DETERMINANTS OF PRICE ELASTICITY OF DEMAND
Elasticity of demand differs from commodity to commodity. The various factors upon which elasticity depends are the following:
1. Substitute goods: A commodity will have elastic demand if there are good substitutes for it. This is because when price of a good rises, a consumer will not buy the good but purchase its substitute.
2. Nature of commodity: All necessities like salt, rice etc that have no substitutes/or less substitutes will have an inelastic demand. People have to purchase such commodities for their sustenance. Therefore, there will be some demand despite the changes in price. Demand for luxury goods, on the other hand, will be elastic. If prices of such commodities rise even a little, consumers refrain to buy. At the same time a little lowering of price of such commodities attract a large number of consumers.
3. Number of uses of commodity: The larger the number of uses to which a commodity can be put, the higher will be its elasticity. Therefore the demand of such goods will have elastic demand. For example, milk can be used for various purposes such as for making curd, cake, sweets etc. When its price goes down, demand increases but a little rise in its price makes demand fall greatly.
4. Possibility of postponement of consumption: If there is a possibility of postponement of consumption of a commodity then demand will be elastic otherwise inelastic. Demand for certain goods can be postponed for sometime such as computers, printers, scanners etc. People may wait till they become cheaper. Therefore, their demand is elastic. But the demand for food or electricity cannot be postponed. As such their demand is inelastic.
5. Percentage of income spent: The elasticity of demand is also influenced by the percentage of income spent on the purchase of a commodity. If the percentage is very less then the demand will be inelastic. For instance, we spend a very less amount of our total money income on things like agarbatties (incense sticks), matches, pens, pencils etc. If prices of such commodities rise also, our demand is not reduced. Thus, demand of such goods is inelastic.
6. Fashion: Commodities, which are in fashion, will have inelastic demand. Fashion minded people do not compromise with price. Even if price is high, some people will demand more just because goods are in fashion.
7. Change in taste: A habitual commodity or a commodity for which consumers have developed a taste will have inelastic demand. A chain smoker always requires a cigarette, whatever the price may be. Likewise, a habitual paan (betel nut) chewer cannot leave his habit, in spite of rise in price. In such cases, therefore, demand is elastic.
8. Price of the commodity: Very high priced or very low priced goods have low elasticity whereas moderately priced commodities are quite high-elastic. If a good is very expensive, demand will not increase much even if there is little fall in its price. And demand will not increase even at very low prices, because people have already purchased their requirement at low prices.