9 factors that determines the elasticity of demand

1. Nature of goods:

Elasticity of demand depends on the nature of goods. The elasticity of demand for a commodity depends upon the necessity of it for a human life. Goods may be necessary for human life, comfort or luxurious. Necessary goods are extremely essential so the demand for these goods-is inelastic.

But the consumption of comfort and luxury goods enhances man's efficiency and social prestige. So their consumption is less important and can be very well postponed. Thus the elasticity of demand for such commodities is elastic.

2. Availability of substitutes:

The demand for a commodity having perfect substitute is relatively more elastic. If a flood gives the same pleasure and satisfaction in place of the consumption of another commodity, it is called a substitute commodity. A substitute may be close and remote.

Close substitute has got more elastic demand and remote substitute has less elastic demand. Tea and coffee are substitute commodities. Both can be used in absence of another. Thus the demand for tea and coffee is elastic.

3. Alternative use:

The demand for those goods having more than one use is said to be elastic. In other words goods having alternative uses are elastic. All the uses are not of same importance. As the commodities are put to certain less urgent needs or uses as a result of fall in price their demand raises. People use those commodities for certain urgent use in response to a rise in price.

For example electricity can be used for a number of purposes like heating, lighting, cooking, cooling etc. If the electricity hill increases people utilise electricity for certain important urgent purpose and if the bill falls people use electricity for a number of other unimportant uses. Thus the demand for electricity is elastic.

4. Possibility of postponing consumption:

The demand for those goods whose consumption can be postponed for sometime is said to be elastic. On the other hand if the commodities cannot be postponed and need to be fulfilled the demand for them is in elastic.

Medicine for a patient, books for a student and milk for a child cannot be postponed. They are to be satisfied first. That is why the demand for those commodities is in elastic.

5. Proportion of income spent:

Elasticity of demand also depends on the proportion of income spent on different goods. The demand for those goods on which a negligible amount of the total income of the consumer is spent is said to be inelastic.

Salt, edible oil, match box, soap etc account for a very negligible amount of the consumer income. That is why their demand is inelastic.

6. Price-level:

The demand for high priced commodities is elastic. On the other hand the low priced goods is said to have inelastic demand. High priced commodities are luxurious goods and low priced goods are necessaries. Luxurious goods are mainly consumed by the people of high income brackets. For example if the price of a colour TV falls from Rs 15000 to Rs 5000 the price comes to the reach of the people who were unable to buy at the old price.

Now they rush to buy colour TV. Thus with a rise or fall in price the amount demanded of colour TV remarkably falls or rise. But if the price of salt raises from Rs 2.00 to Rs 5.00 it account for no such remarkable fall in the quantity demanded of salt.

7. Force of habit:

A repeated and constant use of a commodity by a person forms habit. A habit can't be avoided. Thus in such a case the consumption of the commodity can't be abstained in spite of the rise in price.

The consumer has to satisfy his habit regardless of change in price. Thus the demand for habitual commodities is fairly inelastic.

8. Durability of Commodities:

The demand for durable commodities is elastic whereas the demand for less durable commodity is inelastic. Durable commodity is used over a long period of time. The utility of a durable good is destroyed continuously. Once a durable good is bought the buyer feels no want of it for a long period of time. Thus the change (rise or fall) in price can't influence the demand.

Thus the demand becomes elastic. On the other hand less durable or perishable goods are consumed repeatedly. Any change in price affects the demand. Thus the demand for perishable goods is less elastic.

9. Income level:

Elasticity of demand depends on income level. The rich and the poor are not equally affected at the change in price. Poor people are more affected than the rich. Because of high income rich people buy the same amount of an expensive commodity in response to a rise in price.

For example with a rise in price of Horlicks, poor people by other milk powder relatively cheaper than Horlicks. Thus for rich people the demand for Horlicks is inelastic whereas for poor people the demand for the Horlicks is elastic.