Factors Determining the Elasticity of Demand

Factors Determining the Elasticity of Demand

The demand for a commodity is more elastic and that of the other commodity is less elastic, this usually depends on several factors. It is important to note that the elasticity of demand for a product can change over time. For example, the demand for smartphones has become more elastic in recent years as more and more substitutes have become available. Businesses should consider the factors that affect the elasticity of demand when making pricing decisions. If demand is elastic, businesses may want to consider lowering prices to increase sales. If demand is inelastic, businesses may be able to raise prices without losing too many customers.

  1. Type of Customers

    The Elasticity of Demand for any commodity depends on the wealthy and poor categories of its customers. For the commodities which are purchased by poor customers only, the demand for such commodities is elastic because any change in prices has a greater impact on the customers of this category. Whereas; on the other hand, the demand for those commodities is inelastic and is only purchased by customers of the wealthy category.

  2. Presence of Substitutes

    If a commodity is such, in the absence of which another commodity can also be used, or a substitute of that commodity is available, the demand for such commodity is more elastic.

  3. The Demand for Necessities of Life

    Usually, the demand for the necessities of life like flour is inelastic because these are consumed necessarily in a definite quantity. Thus, even through, the change in prices, their demand remains almost stable.

  4. Demand for Luxury Commodities

    The demand for luxury commodities is highly elastic because these are such commodities without which also man can survive easily. In this context, it should be noted that a commodity can be a luxury for one person and the same can be a necessity for another person. Thus, the elasticity of demand is not the same for all categories of persons in the society.

  5. Joint Demand

    The demand for some commodities is related to one another. When the price of one commodity increases, then along with that commodity, the demand for another related commodity decreases. For example, the demand for scooters and patrols is joint demand. If the price of scooters increases, their demand will fall, as a result, the demand for petrol will automatically fall.

  6. The Proportion of Income Spent on the Commodity

    If only a small part of the income is spent on an article, its demand will be inelastic. For example, matches, salt, sugar etc. In a reverse situation, demand will be elastic.

  7. Possibility of Postponement of Use of a Commodity

    If the use of a commodity can be postponed for some time like that of shoes, woollen blankets etc., the demand for such commodities will be more elastic.

  8. Government Control

    The demand for those commodities whose purchase is prohibited by the government is inelastic.

  9. Income of the Customer

    If the income of the purchasers of a commodity is low, its demand will be more elastic. On the contrary, income being higher, demand would usually be inelastic because, for the rich category of persons, any rise or fall in prices is of not much importance.

  10. Effect of Human Nature and Habits

    The commodities whose use becomes the habit or the need of the customer, like the habit of a particular brand of cigarette or intoxicants, the demand for such commodities becomes inelastic. Similarly, commodities whose use is traditional or for religious purposes, also have inelastic demand.

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