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Determinants of Elasticity of Demand

What Are the Major Determinants of Price Elasticity of Demand?

❶Elasticity of demand measures the responsiveness of demand to a change in price. Generally, the elasticity of jointly demanded goods is inelastic.

What Is Price Elasticity?

Determinants of Elasticity of Demand

The availability of close substitutes. If a product, such as salt, is very inexpensive, consumers are relatively indifferent about a price increase. Therefore, salt has a low price elasticity of demand. Therefore, cars have a higher price elasticity of demand. The period of time under consideration.

Price elasticity of demand is greater if you study the effect of a price increase over a period of two years rather than one week. Over a longer period of time, people have more time to adjust to the price change. If the price of gasoline increases considerably, buyers may not decrease their consumption much after one week. However, after two years, they have the ability to move closer to work or school, arrange carpools, use public transportation, or buy a more fuel-efficient car.

If a government increases the sales tax on a product by 50 cents, does that mean that the equilibrium price of the product will increase by 50 cents? The answer is no. Typically, the equilibrium price will increase less than 50 cents. This means that the cost of supplying the gasoline increases by 50 cents. In the graph below, the supply curve shifts leftward. Note that the vertical difference between supply curve S1 and supply curve S2 is 50 cents the increase in the cost of supplying the gasoline.

The equilibrium price, however, did not increase by 50 cents, because the demand curve is sloped at an angle. The burden of any tax is typically shared between consumers and suppliers.

In the graph below, the tax is shared equally as the price increases by 25 cents. The demand for the necessities of life, such as food and clothing is inelastic as their demand cannot be postponed.

The demand for the Comfort Goods is neither elastic nor inelastic. As with the rise and fall in their prices, the demand decreases or increases moderately. Whereas the demand for the luxury goods is said to be highly elastic because even with a slight change in its price the demand changes significantly. But, however, the demand for the prestige goods is said to be inelastic, because people are ready to buy these commodities at any price, such as antiques, gems, stones, etc.

Several Uses of Commodity: The elasticity of demand also depends on the number of uses of the commodity. Such as, if the commodity is used for a single purpose, then the change in the price will affect the demand for commodity only in that use, and thus the demand for that commodity is said to be inelastic.

Whereas, if the product has several uses, such as raw material coal, iron, steel, etc. Thus, the demand for such products is said to be elastic. Whether the Demand can be Postponed or not: If the demand for a particular product cannot be postponed then, the demand is said to be inelastic. Such as, Wheat is required in daily life and hence its demand cannot be postponed.

On the other hand, the items whose demand can be postponed is said to have elastic demand. Such as the demand for the furniture can be postponed until the time its prices fall. The substitutes are the goods which can be used in place of one another. The goods which have close substitutes are said to have elastic demand.

Such as, tea and coffee are close substitutes and if the price of tea increases, then people will switch to the coffee and demand for the tea will decrease significantly. Whereas, if there are no close substitutes for a product, then its demand is said to be inelastic.

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Price elasticity of demand has four determinants: product necessity, how many substitutes for the product there are, how large a percentage of income the product costs, and how frequently its purchased, according to Economics Help.

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The main determinants/factors which determine the degree of price elasticity of supply are as under: (i) Time period. Time is the most significant factor which affects the .

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Determinants of Elasticity of Demand Apart from the price, there are sever Apart from price, there are several factors that influence the elasticity of demand. The Elasticity of Demand is a measure of sensitiveness of demand to the . The price elasticity of demand (PED) is a measure that captures the responsiveness of a good’s quantity demanded to a change in its price. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand are held constant.

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The more something is considered a 'luxury' the more the price elasticity of demand. Electricity is a necessity so not as affected. However, a vacation is a luxury and could be done without and you won't suffer without a vacation. Determinants of Price Elasticity of Supply A numeric value that measures the elasticity of a good when the price changes.-availability of materials - The limited availability of raw materials could limit the amount of a product that can be produced.