Determining Price Elasticity of Demand:
price elasticity of demand is not the same for all commodities. It may be or low
depending upon number of factor. These factors which influence price elasticity
of demand, in brief, are as under:
Commodities. In developing countries of the world, the per capital
the people is generally low. They spend a greater amount of their income on the
purchase of necessaries of life such as wheat, milk, course cloth etc. They have
to purchase these commodities whatever be their price. The demand for goods of
necessities is, therefore, less elastic or inelastic. The demand for luxury
goods, on the other hand is greatly elastic.
For example, if the price of burger falls, its demand in the cities will go up.
(ii) Availability of Substitutes. If a good
has greater number of close substitutes available in the market, the demand for
the good will be greatly elastic.
For examples, if the price of Coca Cola rises
in the market, people will switch over to the consumption of Pepsi Cola, which
is its close substitute. So the demand for Coca Cola is elastic.
(iii) Proportion of the Income Spent on the Good.
If the proportion of income spent on the purchase of a good is very small, the
demand for such a good will be inelastic.
For example, if the price of a box of
matches or salt rises by 50%, it will not affect the consumers demand for these
goods. The demand for salt, maker box therefore will be inelastic. On the other
hand, if the price of a car rises from $6 lakh to $9 lakh and it takes a greater
portion of the income of the consumers, its demand would fall. The demand for
car is, therefore, elastic.
(iv) Time. The period of time plays an
important role in shaping the demand curve. In the short run, when the
consumption of a good cannot be postponed, its demand will be less elastic. In
the long run if the rise price persists, people will find out methods to reduce
the consumption of goods. So the demand for a good in the, long run is elastic,
other things remaining constant.
For example if the price of electricity goes
up, it is very difficult to cut back its consumption in the short run. However,
if the rise in price persists, people will plan substitution gas heater,
fluorescent bulbs etc. so that they use less^electricity. So the electricity of
demand will be greater (Ed = > 1) in the long run than in the short run.
(5) Number of Uses of a Good. If a good can be
put to a number of uses, its demand is greater elastic (Ed > 1).
For example, if the price of coal falls, its quantity
demanded will rise considerably because demand will be coming from households,
industries railways etc.
(6) Addition. If a product is habit forming
say for example, cigarette, the rise in its price would not induce much change
in demand. The demand for habit forming good is, therefore, less elastic.
(7) Joint Demand. If two goods are Jointly
demand, then the elasticity of demand depends upon the elasticity of demand of
the other Jointly demanded good.
For example, with the rise in price of cars, its
demand is slightly affected, then the demand for petrol will also be less