Determining the Elasticity of Demand (14 Factors)

Some of the factors determining elasticity of demand are as follows:

1. Nature of the Commodity:

Generally, all commodities can be divided into three categories i.e.

(i) Necessaries of Life:

For necessaries of life the demand is inelastic because people buy the required amount of goods whatever their price. For example, necessaries such as rice, salt, cloth are purchased whether they are dear or cheap.

(ii) Conventional Necessaries:

The demand for conventional necessaries is less elastic or inelastic. People are accustomed to the use of goods like intoxicants which they purchase at any price. For example, drunkards consider opium and wine almost as a necessity as food and water. Therefore, they buy the same amount even when their prices are higher and highest.

(iii) Luxury Commodities:

The demand for luxury is usually elastic as people buy more of them at a lower price and less at a higher price. For example, the demand of luxuries like silk, perfumes and ornaments increases at a lower price and diminishes at a higher price. Here, we must keep in mind that luxury is a relative term, which varies from person to person, place to place and from time to time. For example, what is a luxury to a poor man is a necessity to the rich. The luxury of the past may become a necessary of today. Similarly a commodity which is a necessity to one class may be a luxury to another. Hence, the elasticity of demand in such cases should have to be carefully expressed.

2. Substitutes:

Demand is elastic for those goods which have substitutes and inelastic for those goods which have no substitutes. The availability of substitutes, thus, determines the elasticity of demand. For instance, tea and coffee are substitutes. The change in the price of tea affects the demand for coffee. Hence, the demand for coffee and tea is elastic.

3. Number of Uses:

Elasticity of demand for any commodity depends on its number of uses. Demand is elastic; if a commodity has more uses and inelastic if it has only one use. As coal has multiple uses, if its price falls, it will be demanded more for cooking, heating, industrial purposes etc. But if its price rises, minimum will be demanded for every purpose.

4. Postponement:

Demand is more elastic for goods the use of which can be postponed. For example, if the price of silk rises, its consumption can be postponed. The demand for silk is, therefore, elastic. Demand is inelastic for those goods the use of which is urgent and, therefore, cannot be postponed. The use of medicines cannot be put off. Hence”, the demand for medicines is inelastic.

5. Raw Materials and Finished Goods:

The demand for raw materials is inelastic but the demand for finished goods is elastic. For instance, raw cotton has inelastic demand but cloth has elastic demand. In the same way, petrol has inelastic demand but car itself has only elastic demand.

6. Price Level:

The demand is elastic for moderate prices but inelastic for lower and higher prices. The rich and poor do not bother about the prices of the goods that they buy. For example, rich buy Banaras silk and diamonds etc. at any price. But the poor buy coarse rice, cloth etc. whatever their prices are.

7. Income Level:

The demand is inelastic for higher and lower income groups and elastic for middle income groups. The rich people with their higher income do not bother about the price. They may continue to buy the same amount whatever the price. The poor people with lower incomes buy always only the minimum requirements and, therefore, they are induced neither to buy more at a lower price nor less at a higher price. The middle income group is sensitive to the change in price. Thus, they buy more at a lower price and less at higher price.

8. Habits:

If consumers are habituated of some commodities, the demand for such commodities will be usually inelastic. It is because that the consumer will use them even their prices go up. For example, a smoker, generally, does not smoke less when the price of cigarette goes up.

9. Nature of Expenditure:

The elasticity of demand for a commodity also depends as to how much part of the income is spent on that particular commodity. The demand for such commodities where a small part of income is spent is generally highly inelastic i.e. news paper, boot-polish etc. On the other hand, the demand of such commodities where a significant part of income is spent, elasticity of demand is very elastic.

10. Distribution of Income:

If the income is uniformly distributed in the society, a small change in price will affect the demand of the whole society and the demand will be elastic. In case of unequal distribution of income and wealth, a change in price will hardly influence the poor section of the society and the demand will be relatively inelastic.

11. Influence of Diminishing Marginal Utility:

We know that utility falls when we consume more and more units but not in a uniform way. In case utility falls rapidly, it means that the consumer has no other near substitutes. As a result, demand is inelastic. Conversely if the utility falls slowly, demand for such commodity would be elastic and extend much for a fall in price.

12. Influence of Consumer’s Surplus:

There is relationship between elasticity of demand and consumer’s surplus. Generally, necessaries provide us more consumers’ surplus. Whenever consumer’s surplus is high, the margin between the actual price and potential price is high and the consumer does not change the demand so long the price increases within the margin. But in case of those commodities where marginal utility is equal to price, and the consumer does not get any surplus. Therefore, the consumer being on the margin easily changes the demand when there is change in price. Hence, the elasticity of demand varies inversely with consumer’s surplus.

13. Joint Demand:

In case of a commodity being demanded jointly such as car and petrol, its elasticity will be directly governed by the elasticity of other commodities which are jointly demanded in the market. For example, if the demand for car is inelastic, the demand for petrol will also be inelastic.

14. Time:

The demand for a commodity is always related to some period of time. This implies that elasticity of demand varies with the length of time periods. In case of long period, elasticity of demand will be elastic while in the short period, it will be inelastic. This is due to the fact that during short period, generally demand does not change immediately due to price changes. Moreover, changing of habits and changing of equipment’s are not easy. However, it is possible in the long period.

Thus from the above discussion, it is clear that in first place, it is difficult to know whether the demand for any good is elastic or less elastic. It will depend on the range of prices, reaction of the consumers and the time period in which the price changes. Secondly, the elasticity of demand depends on the price of the commodity, proportion of income spent on the commodity, availability of substitutes etc.