What are the factors to be considered while determining the elasticity of demand?

Advertisements:

 


The leading determinants of elasticity of demand of a good may are mentioned below. It should be noted that they are more or less the same as determinants of the demand itself.

1. Nature of the Good:

A consumer tries to satisfy his wants by starting with the most intensive ones. Accordingly, those goods, which are in the nature of necessities, have low elasticity of demand, followed by that of comforts and luxuries.

2. Substitutes:

A good, which has close substitutes, tends to have an elastic demand compared with the one, which cannot be substituted. It should be noted that while some goods, considered as a whole (such as cooking oils) may have inelastic demand, a particular good within this category may have a highly elastic demand. For example, consumers may not like to pay extra for a particular brand of mustard oil when its substitutes are available at a lower price.

3. Multiple Uses:

The consumer finds it easier to adjust the quantity demanded of a good when it is to be used for satisfying several wants than if it is confined to a single use. For this reason, a multiple-use good tends to have more elastic demand.

4. Postponing Consumption:

If the consumer find that it is possible for him to postpone the consumption of a good without undue difficulty, then he postpones his purchase of a good if its price goes up and is expected to fall again. In this case, therefore, the good has an elastic demand.

5. Share in the Consumer's Budget:

Elasticity of demand for a good is also dependent upon the proportion of a consumer's budget spent on it. The consumer does not feel the pinch of price rise if he spends a very small part of his budget on it. He is ready to pay more for it than go without it. As a result, the good has a less elastic demand. Just the opposite is the case when the portion of a consumer's budget spent on it is high.

6. Time Factor:

Normally speaking, a typical consumer finds it difficult to adjust his consumption of a good in the short run. He needs time to adjust to the changed situation. Therefore, demand elasticity of a good tends to increase in the long run.

7. Price Range:

It is generally believed that a good whose price fluctuates over a very wide or a very narrow range has an inelastic demand.

8. Income Level of Consumers:

The pinch of a price rise is felt less by higher income consumers. They are also less induced to buy more of a good when its price falls. As a result, the demand of good tends to become less elastic as we move from lower to higher income consumers.


Advertisements: