Factors affecting the magnitude of price elasticity of demand

Elasticity of demand differs from commodity to commodity. Not only that, elasticity of de­mand of the same commodity may be different for different persons. These differences in elasticity of demand are due to various causes, which are discussed below:

1. Price level:

Generally, the demand for very costly and very cheap goods is elastic. Very costly goods are demanded by the rich people and hence their demand is not affected much by changes in prices. For example, increase in the price of Maruti Car from Rs. 3, 00,000 to Rs. 3, 20,000 will not make any noticeable difference in its demand. Similarly, the changes in the price of very cheap goods (such as salt) will not have any effect on their demand, for a very small part of income is spent on such commodities.

2. Availability of Substitutes:

The demand for a commodity will be very elastic if some other commodities can be used for it. A small rise in the price of such a commodity will induce consumers to use its substitutes. For example gas, kerosene oil, coal etc. will be used more as fuel if the price of wood increases. On the other hand, the demand of such commodities is inelastic which have no substitutes such as salt.

3. Time period:

Longer is the time period more elastic is the demand. In the short period if price of a commodity like petrol is increased, its demand will not fall immediately and hence it would be inelastic or less elastic. But if period is longer alternative sources of energy can be developed and hence demand would be elastic.

4. Proportion of total expenditure spent on the product:

If a small proportion of total expendi­ture is spent on a commodity, its demand will be inelastic such as demand for salt. On the other hand, if a major portion of total expenditure is spent on a commodity, its demand will be more or highly elastic such as demand for luxuries.

5. Habits:

Some products which are not essential for some individuals are essential for others. If individuals are habituated of some commodities the demand for such commodities will be usually inelastic, because they will use them even when their prices go up. A smoker generally does not smoke less when the price of cigarette goes up.

6. Nature of the commodities:

Generally, the demand for necessaries is inelastic and that for comforts and luxuries of life elastic. This is so because certain goods which are essential to life will be demanded at any price, whereas goods meant for luxuries and comforts can be dispensed with easily if they appear to be costly.

7. Various uses:

Generally, a commodity which has several uses will have an elastic demand such as milk, wood etc. On the other hand, a commodity having only one use will have inelastic demand.

8. Postponement:

Usually the demand for such commodities whose use can be postponed for some time is elastic. For example, the demand for V.C.R. is elastic because its use can be postponed for some time if its price goes up, but the demand for rice and wheat is inelastic because their use cannot be postponed when their prices increase.