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

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1. Substitutes:

Generally speaking, a consumer can choose between several goods for satisfying a given want. Therefore, the demand for a good is affected not only by its own price but also by the prices of its substitutes. If a good has close substitutes, the consumer finds it easier to switch from it to its substitutes and vice versa and its demand tends to be more elastic. It also follows that price elasticity of a good increases if has a larger number of substitutes.

2. Number of Uses:

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If an item has a large umber of uses, the consumer finds it easier to adjust its consumption. In case of need, he can re-allocate the good over alternative uses and alter the quantity demanded. Therefore, such goods have higher price elasticity of demand. For instance, milk which can be used for direct consumption, for curd, for sweets, for ice-cream etc.

3. Share in Consumer’s Budget:

On account of a price rise of a good, a consumer feels more concerned if he is spending a large proportion of his budget on it. The extent of change in demand by the consumer is not significant in the case of those goods which are low priced, or on which the consumer spends a very small proportion of his monthly budget. In the former case, elasticity of demand is higher, while in the latter cases, it is low.

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