Factors Influencing Elasticity of Demand
Why is demand for salt inelastic while demand for cinema tickets is elastic? The answer lies in the determinants of elasticity of demand.
1. Nature of the Commodity
- Necessities (rice, salt, medicines) → usually inelastic demand.
- Comforts & Luxuries (ACs, cars, jewellery) → usually elastic demand.
Key Point
More necessary the good, more inelastic its demand tends to be.
2. Availability of Substitutes
- If close substitutes are available (tea & coffee, brands of soap) → demand is more elastic.
- If there are no close substitutes (railway service on a particular route) → demand is inelastic.
3. Proportion of Income Spent
- Goods that take small share of income (salt, matchbox) → inelastic.
- Goods that take large share of income (vehicles, foreign tours) → elastic.
4. Time Period
- Short-run: demand is usually less elastic (habits cannot change quickly).
- Long-run: demand becomes more elastic (people can adjust habits, find substitutes).
Example: Petrol demand is inelastic in short-run, but in long-run people may buy fuel-efficient vehicles.
5. Habitual Consumption
- Goods consumed out of habit (cigarettes, pan, tea for addicts) → demand tends to be inelastic.
6. Possibility of Postponement
- If consumption can be postponed (buying a car, TV) → demand is elastic.
- If consumption cannot be postponed (life-saving drugs) → demand is inelastic.
7. Range of Prices
- At very high or very low prices, demand may be inelastic.
- In the middle range, demand is often more elastic.
8. Number of Uses of a Commodity
- Goods with multiple uses (electricity, water) → more elastic in long run because consumers can adjust quantity depending on price.
9. Income Level of Consumers
- High income groups: less affected by price changes → demand relatively inelastic.
- Low income groups: more affected → demand more elastic.
10. Advertising and Brand Loyalty
- Strong advertising and brand loyalty can make demand less elastic because consumers do not easily switch to competitors.
11. Summary Comparison
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12. Quick Revision Points
- Elasticity depends on nature of good, substitutes, income share, time period, habits, postponement, uses, income level, advertising.
- Managers and governments must study these factors before changing prices or taxes.
13. Quiz Time 🎯
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