Factors affecting Price Elasticity of Demand

It is important to know that demand for some goods is more elastic (e_p>1, percentage change in quantity demanded is more than percentage change in price) while for others it is less elastic (e_p<1, percentage change in quantity demanded is less than percentage change in price), depending on many factors.

Some of the important determinants of price elasticity of demand are:

1) Nature of commodity :

Nature of commodity refers to whether the commodity is ‘necessary’, ‘luxury’ or ‘comfort’ in nature.

‘Necessary’ commodities, such as food items are essential for existence, these goods have to be purchased in fixed quantities, whether the price is high or low.

A change in the price of the necessities may have a small impact on the demand i.e. have inelastic demand (e_p<1).

‘luxury’ or ‘comfort’ commodities, such as television, a.c, furniture etc are not necessary for existence and their consumption can be postponed. Thus their demand changes by larger amount due to a small change in price i.e. have elastic demand (e_p>1).

The demand for necessities is inelastic and the demand for luxuries and comforts is elastic.

2) Availability of Substitutes :

Demand for goods which have close or many substitutes like tea and coffee, pepsi and coke, is relatively more elastic (e_p>1).

For example, when the price of coffee falls, price of tea remaining the same, consumer will purchase more of coffee than tea since coffee is now relatively cheaper than his substitute tea.

Hence, with a small fall in the price of coffee, quantity demanded of coffee is more.

Also when the price of such goods rises, the consumer has the option of shifting to its substitute.

Goods without close substitute like milk, salt, sugar etc. will show inelastic demand (e_p<1).

The consumer will have to buy it whether its price is low or high.

For example, when the price of milk rises, as it does not have close substitute, quantity demanded will not fall much and vice versa.

The demand for commodities with more substitute is elastic and with weak or no substitutes is inelastic.

3) Diversity of uses :

Commodities that can be put to a variety of uses have elastic demand (e_p>1). 

For instance, electricity has multiple uses. It is used for lighting, room heating, cooking, air conditioning etc.

If the price of electricity increases, its use may be restricted only to important purposes like lighting. Other uses may be abandoned.

With the rise in price, quantity demanded fall more than the rise in price i.e demand is elastic.

If a commodity such as paper has only few uses, its demand is likely to be inelastic (e_p<1).

The demand for commodities with more uses is elastic and with less uses is inelastic.

4) Postponement of use :

Demand will be elastic (e_p>1) for goods, the consumption of which can be postponed. 

For example demand for residential houses, demand is generally low when interest rate is high, consumers generally postponed their purchase.

But when the interest rate fall slightly, the quantity demanded rises more than the price.

But the consumption of food items cannot be postponed, so they have an inelastic demand (e_p<1).

The demand for commodities which can be postponed is elastic and which cannot be postponed is inelastic.

5) Income level of the buyers :

The demand for goods like soap, matches etc is inelastic (e_p<1), since the consumers spends a very small proportion of his income on them.

When the prices of such goods rises, it will not make much difference in consumer’s budget and will continue to buy the same quantity of the commodity.

On the other hand demand for clothes, furniture etc. is likely to be elastic (e_p>1), since the consumer spends a large fraction of his income on these goods.

A change in the price of will have great effect on the consumer’s budget, so will affect his demand to a great extent.

Smaller is the proportion of income spent on a commodity, the demand is inelastic and higher is the proportion of income spent on a commodity, the demand is elastic.

6) Habits of the consumer :

Goods to which the consumer become accustomed or habitual will have inelastic demand (e_p<1), like cigarette and tobacco.It is because of this factor that the demand for cigarette and liquor does not reduce even when these goods are highly taxed.

7) Price level :

Demand for a commodity tends to be inelastic (e_p<1) at very high and very low prices, and elastic (e_p>1) within the moderate range of prices.

When the price is very high only rich consumers can afford it and high price will not affect them in buying it.

When the price is very low, it will not lead to much increase in amount demanded as now all can afford it.

When the price is moderate, its within the range of large number of consumers so demand is elastic.

8) Time Period :

Demand is inelastic in short period but elastic in long period.

It is because, in the long run, a consumer can change his consumption habits more easily than in the short period.

Also many substitutes are available in long run making the commodity demand inelastic.