Elasticity of Demand for a Commodity: 12 Factors

What makes the demand for one commodity elastic and the demand for another inelastic?

The following points highlight the twelve main factors affecting the elasticity of demand for a commodity. The factors are: 1. Availability of Substitutes 2. Position in the Budget 3. Nature of Commodity 4. Number of its Uses 5. Consumer’s Income 6. High Price Goods and Range of Price Changes Goods and Others.

Factor # 1. Availability of Substitutes:

The availability of substitutes for a commodity is the most important which affect the Elasticity of Demand.

If the commodity has many close substitutes the demand for such a commodity will be highly elastic.

The reason is that where exists a close substitute in the relevant price range, its demand will tend to be elastic. But in respect of a commodity having no substitute, the demand will be somewhat inelastic. Thus, for example, demand for salt, potatoes, onions etc., is highly inelastic as there are no close or effective substitutes for these commodities.

While commodities like tea, coffee or beverages such as Pepsi-Cola, Gold Spot, Fanta, Sosyo etc., having a wide range of substitutes have a more elastic demand in general.

Factor # 2. Position in the Budget:

The position of a commodity in consumer’s budget also affects its elasticity. Budget position means the fraction of total expenditure devoted to a single commodity. The elasticities of such commodities on which a small percentage of income is spent are relatively less elastic. For example: Soap, matches, ink etc., are such commodities on which larger position of income is spent are of elastic in nature.

Factor # 3. Nature of Commodity:

Certain goods by their very nature tend to have an elastic or inelastic demand. By nature goods may be classified into luxury, comforts or necessary goods. In general demand for luxuries and comforts is relatively elastic and that of necessaries relatively inelastic. Thus, for example: The demand for food-grains, cloth, salt etc., is generally inelastic while that for radio, furniture, car etc., is elastic.

Factor # 4. Number of its Uses:

Single-used goods will have less elastic demand as compared to multi-use goods. For Example: Commodities like—coal or electricity having a composite demand, elasticity is relatively high. With a fall in price these commodities may be demanded greatly for various uses.

It is however also possible that the demand for a commodity which has a variety of uses may be elastic in some of the uses and may be inelastic in some other uses, e.g., coal used by railways and by consumers as fuel. But the former’s demand is inelastic as compared to the latter’s.

Factor # 5. Consumer’s Income:

Generally, it has been seen that larger the income of a consumer, his demand for over all commodities tends to be relatively inelastic. The demand for over all commodities tends to be relatively inelastic. The demand pattern of a millionaire is rarely affected even by significant price changes.

Similarly, the redistribution of income in favour of low-income people may tend to make demand for some goods relatively inelastic.

Factor # 6. High Price Goods and Range of Price Changes Goods:

According to Prof, Marshall—”Elasticity of demand is great for high prices and great or at least considerable for medium prices but it declines as the price falls and gradually fades away if the fall goes so far that satiety level is reached.”

There are certain goods like costly luxury items or bulky goods such are refrigerators, T.V. sets etc. which are highly priced in general. In their case, a small change in price will have an insignificant effect on their demand. Their demand will therefore, be inelastic.

If the price change is large enough then their demand will be elastic. Similarly, if there are divisible goods like potatoes and onions etc. which are relatively low priced and bought in bulk, so a small variation in price will not have much effect on their demand, therefore demand tends to be inelastic in their case.

Factor # 7. Where Demand can be Postponed?

The commodity, purchase and use of which can be deferred have a highly elastic demand. For example: In the rainy season the demand for an umbrella cannot be deferred and accordingly it is inelastic. However during winter, where the demand for woolen clothes can’t be postponed it is rather inelastic.

Factor # 8. Joint Demand or Complementarity of Goods:

The joint demand is usually inelastic. In other words, goods which are jointly demanded have less elasticity. If the price of fountain pens falls it does not necessarily leads to an increase in the demand of ink.

Factor # 9. Particular Use:

The demand of a commodity can be elastic for a particular use while for another it may be inelastic. For example: The demand of wheat for human beings is inelastic but for animals it is elastic. Thus, the elasticity of demand does not depend only on a particular single factor.

While examining the elasticity or inelasticity of demand of any commodity, we must always consider which particular section of society, we have under study.

Factor # 10. Influences of Habit and Customs:

It is an important factor in determining the elasticity. If a consumer is habituated or addicted to the use of a commodity say tobacco and alcohol, its demand will be inelastic. Further, there are certain articles which have a demand on account of conventions, customs or habit with which these articles are closely associated and in those cases elasticity is less, e.g., “Mangal Sutra” to a Hindu bride has inelasticity of demand.

Factor # 11. Time Element—According to Prof. Marshall:

“Time factor has also an important influence on elasticity”. In the short period demand in general will be less elastic while in the long period, it becomes more elastic.

This is because:

(i) It takes some time for the news of price change to reach all the buyers;

(ii) Consumers may expect a further change, so they may not react to an immediate change in price;

(iii) People are reluctant to change their habits all of a sudden but gradually, in the long run their habits may change and so too the demand pattern;

(iv) Durable goods take some time to exhaust their utility. In the long-run, lapse of time results in their wearing out, then these are demanded more;

(v) Demand for certain commodities may be postponed for some time, but in the long-run it has to be satisfied.

Factor # 12. Standard of Living:

The standard of living of the people in the society also affects the demand. If the standard of living is already very high, the demand will be equally inelastic. It is because people will high incomes are less effected by the change in prices.

Thus, whether the demand for a commodity is elastic or inelastic depends on various factor. In actual life we cannot assert with any force which commodity has a high elasticity and which has a low degree of elasticity. While taking a judgment on the elasticity of the demand for a commodity we must take all the determinant into account.