Economics

How Determinants Elasticity of Demand

imagesLaw of demand explains the relationship between quantity demanded and price. Quantity demanded varies inversely with the price .  According to law of demand other things being equal when price rises, demand for that commodity contracts and when price falls, demand for that commodity extends. The responsiveness of demand to a change in price  called the elasticity of demand. There are several factors which determine the elasticity of demands.

Nature of Commodity

The elasticity of demand for necessities of life is less elastic because due to increase in price, the demand for that commodity does not contract proportionately and for comforts and luxuries the elasticity of demand is more elastic because even a little change in price brings big change in quantity demanded.

For Substitutes Demand is Elastic

If the commodity has substitutes the elasticity of demand is elastic because when price increases the substitute’s looks cheaper and purchase of substitute’s increases. The response of demand is greater than the change in prices.

Share in Total Consumption Expenditure

If the share of the commodity in total expenditure is greater to an increase in the price demands contract more hence, demand is more elastic and if the share is less than it does not affect the demand and demand is inelastic.

Goods Having Several Uses

If a good  used in more than one use, the demand is more elastic. If the price increases it will used only where its use necessary and with a decrease in prices it used even in unnecessary uses.

Durable Goods

The more durable is a good, the greater is the elasticity and vice versa. Because if the price is increases than people uses that commodity for longer period. For perishable goods demand is less elastic.

Price Level

Elasticity of demand for these goods that are either high priced or low priced is less elastic. Because with a small decrease in price poor people cannot purchase it and if the commodity is low priced then it is being purchase in sufficient quantity so further decrease in price does not cause an extension in demand.

Income Legal

For rich elasticity of demand different commodities is less elastic because increase in price does not affect their consumption expenditure. For poor, elasticity of demand is more elastic because even a small change in price brings greater change in demand.

Postponement of Demand

A commodity whose demand can be postponed in more elastic when gold is costly its demand is postponed and when it is cheaper its demand extends.

Habit and Fashion

A commodity which liked by the people or it is fashion demand is inelastic because people purchase even at higher price.

Future expectations

If price of commodity expected to rise in future, a small decrease in price produces a considerable increase in demand and vice verse.