There are several factors governing the elasticity of demand for a commodity. They are explained below.
1. Availability of substitutes:
A commodity will have elastic demand if there are good substitutes for it. A small rise in the price of a commodity will send buyers to the substitutes. A lower price of a commodity will invite the former buyers of the substitute goods. A rise in the price of Brooke Bond tea may encourage buyers to use Lipton tea and vice versa. If no substitutes are available, demand for goods will be inelastic. Demand for salt is perfectly inelastic because it has no substitute.
2. Nature of the commodity:
Demand for necessaries is inelastic, because they are indispensable for human existence. On the other hand, the demand for comforts and luxuries is generally elastic because these goods are not very essential for life and are demanded only when their prices are reasonable.
3. Postponement of consumption:
The demand for goods the consumption of which can be deferred for some time is elastic as the demand for the V.C.R. it can be postponed for some time if prices are higher. The demand for necessaries like food grains is inelastic because their use cannot be deferred.
4. Proportion of expenditure:
The demand for a good on which a small proportion of income is spent is inelastic. Salt, matchbox, and soap etc. are its examples. On the contrary, the demand for such commodities where a major part of income is spent is elastic like the demand for comforts and luxuries.
5. Alternative use:
A commodity having several uses has an elastic demand. For example, electricity, coal, and steel etc. have several uses. The uses to which electricity raises demand for electricity for cooking or heating rooms etc. will fall. It will be used only for the most important purpose. Similarly, with a fall in its price it will be used only for other purpose. On the other hand, a commodity having only one use will have inelastic demand. It may be mentioned that the demand for a good may be elastic for one use and inelastic for another.
6. The time period:
Elasticity of demand varies with the length of the time period. Generally, longer the duration of period. Greater will be elasticity of demand and vice versa. This implies that demand is elastic in the long period and inelastic in the short period. This is so because in the short period generally demand does not change immediately due to price changes.
If consumers are habituated with certain goods the demand for such goods will be usually inelastic because they will use them even when their prices go up. A smoker generally does not give up smoking or does not smoke less when the price of cigarette goes up.
8. Joint demand:
In the event of a good being jointly demanded such as car and petrol, the elasticity of demand of the second good depends on the elasticity of demand of the main good. For example, if the demand for car is inelastic, the demand for petrol will also be inelastic.
9. Distribution of income:
The more equal distribution of income, the more will be the number of middle-class people. Their demand is relatively more elastic. If the distribution of income is not equal, on the one hand, there will be poor people and on the other hand, there will be rich people. The poor people will buy only necessaries and their demand will be inelastic. The rich will not be affected by price changes. Hence, the demand of the rich will also be inelastic.
10. Price Level:
The demand for very costly and very cheap goods is inelastic. Very costly goods are demanded by the rich. Their demand is not affected by price changes. Similarly changes in the price of very cheap goods like salt or match box will not affect on their demand. At a very low price, everybody can purchase a good in enough quantity. Usually demand will be elastic at moderate prices.