Factors Affecting Price Elasticity of Demand

The following points highlight the top thirteen factors affecting price elasticity of demand. The factors are: 1. The availability of substitutes 2. Definition of the commodity 3. Durability 4. The proportion of expenditure spent on the commodity 5. Time 6. The number of uses 7. Necessities and luxuries 8. Complementary vs. substitute goods 9. Possibility of the postponement of consumption and a few others.

Factor # 1. The Availability of Substitutes:

Commodities which have good sub­stitutes have an elastic demand. Tea can be substituted by coffee. If the price of tea rises many people can give it up and take coffee instead. Hence, a rise in the price of tea will lead to a large fall in the quantity purchased of tea.

Commodities which have no good substitutes have an inelastic demand because people cannot turn to any other commodity when price rises. As Lipsey puts it, “A product with close substitutes tends to have an elastic demand; one with no close substitutes tends to have an inelastic demand”.

Factor # 2. Definition of the Commodity:

Price elasticity of demand depends on how closely a commodity is defined. In fact, the availability of substitutes depends on the definition of the commodity. Suppose, we consider food. Food is a broad item of human consumption. It has no substitute. Therefore, the demand for food is inelastic. On the other hand, we can adopt a narrow definition of food and consider a particular variety of food such as fish.

If the price for fish rises very much, most people will buy more eggs or mutton. Thus, the demand for fish is elastic. Similarly, the demand for a particular variety of cigarette is more elastic than the demand for cigarettes in general. If the price of cigarette rises its demand may not fall much (because most people smoke cigarettes due to addiction).

But, if the price of a particular variety of cigarettes rise faster than prices of other varieties, the demand for the former variety will fall very much. To quote Lipsey, “Any one of a group of related products will tend to have an elastic demand, even though the demand for the group as a whole may be inelastic”.

Factor # 3. Durability:

If a commodity is not durable, e.g., toilet paper, it will have to be replaced fairly often, even though the price has risen in the meantime. Thus, a rise in price does not have a great effect on quantity demanded — demand is inelastic.

Commodities which last a long time, i.e., durable commodities (e.g., radios, T.V. sets, etc.) generally have an elastic demand. The reason is that when the prices of such commodities increase people can postpone pur­chases. Hence, the quantity demanded is not much affected by price changes.

Durables as a whole have less elastic demands than do individual kinds of durable goods. For example, when the prices of television sets rise, many consumers may replace their lawnmower or their vacuum cleaner instead of buying a new television set. Thus, although their purchases of television sets will fall, their total purchases of durables may not fall much.

Factor # 4. The Proportion of Expenditure Spent on the Commodity:

If a large proportion of people’s expenditure is taken up by a commodity, a change in price is likely to have a greater effect on quantity demanded than if the proportion had been very small. For example, if an individual goes to a movie at a particular venue three times each week and the price of admission is doubled, then he may cut down on the number of times he goes there. If, on the other hand, an individual goes there only once or twice a year, the doubling of the price is not likely to have as great an effect.

Again, if we think of a low-priced commodity such as tyres, a doubling of the price will not have as much effect on quantity demanded as would, for example, a doubling of the price of a high-value items such as cars.

Thus, if a commodity takes up a large proportion of expenditure, demand is likely to be more elastic than it will be for a commodity which takes up only a small proportion of expenditure.

Factor # 5. Time:

Time also exerts considerable influence on price elasticity of demand. Demand is more elastic in the short-run than in the long-run. If, for instance, taxi fare in Calcutta rises by 25% all of a sudden, the demand for the service of taxis will fall drastically for at least one or two weeks. But demand will gradually pick up thereafter and demand will be less elastic (more inelastic) after some time.

The basic reason is that people’s initial reaction to price increase is more drastic than people’s ultimate reaction to it. Price elasticity of demand is likely to be greater, the longer the time period involved. For one thing, it takes time for people to become aware of price changes. As time goes on, more and more people will become aware of a change in the price of a commodity and will adjust their demand accord­ingly, if they so wish.

Another reason why elasticity will be greater in the long-run is that, when the price of a commodity rises, some people who are particularly fond of the commodity will put off reducing their purchases for as long as they can. As Lipsey puts it, “The response of quantity demanded to a given price change, and thus the measured price elasticity of demand, will tend to be greater the longer the time-span considered.”

Factor # 6. The Number of Uses:

Commodities which can be used for a variety of purposes have an elastic demand. Coal is used in factories, railways and also for cooking. When its price falls, it will be demanded more for all these purposes and the total increase in demand will be large.

Conversely, when its price rises, its use can be much reduced for some purposes, for example, people will use wood in its place for cooking. Hence, the demand for such a commodity is elastic. Again, when a commodity is used only for one or two purposes, its use in those purposes cannot be altered much. Hence, price changes have less effect on quantity purchased.

Factor # 7. Necessities and Luxuries:

Salt, for instance, is a necessary good. A certain amount of salt must be consumed, whatever be the price. Even if its price rises it is impossible to reduce its consumption much. On the other hand, if the price of salt falls, people generally do not eat more salt. Hence, changes in the price of this commodity do not have much effect on its consumption. But, salt is used in some industrial processes like tanning of leather.

Therefore, a fall in the price of salt will lead to some increase in the amount purchased. But, as the major part of the salt produced is used for eating, the total amount purchased will not increase much. Hence, the demand is inelastic. Luxury articles have an elastic demand. The consump­tion of luxuries can be quickly reduced when price rises. Also, when the price of such articles falls people quickly increase consumption, because such articles give pleasure.

Factor # 8. Complementary vs. Substitute Goods:

A similar analysis can be made for complementary goods in comparison with substitute goods. A person does not cease driving a car simply because the replacement cost of tires (complementary goods), which may be needed, rises by 10 to 20 per cent. The driver may, however, a substitute re-treads for new tires. If airline cargo charges increase, however, a manufacturer may ship by rail, by truck, by water, or other means of transportation.

If the admission price of a profes­sional football game were raised, a couple may decide to go to movie instead of watch television. Substitute goods or services tend to have greater price elasticity of demand than do complementary goods and services, because the user can turn to alternatives if prices rise.

Factor # 9. Possibility of the Postponement of Consumption:

When the consump­tion of a commodity can be postponed (e.g., hair-dressing oil or perfumes), an increase in the price would cause a sharp fall in its demand. So, here the demand becomes elastic. The consumption of food articles cannot be post­poned and accordingly the demand for these becomes relatively inelastic.

Factor # 10. Level of Prices:

When the price of a commodity is already high, any further rise in price would cause a large fall in its demand. Again, on the other hand, when the price of a commodity is already low (e.g., cheap quality fountain pen), any further fall in price would not cause a large increase in demand. So, the demand for a commodity is elastic at high prices and inelastic at lower prices.

Factor # 11. Income Level:

The same commodity has different demand elasticity to the people of different income groups. Thus, the demand for a car or a TV set is in general elastic to the people of ordinary means; but, it may become inelastic to the rich people.

Factor # 12. Habits and Conventions:

The demand for some commodities like tobacco, betel leaf, snuff etc. becomes relatively inelastic through long use out of habits or conventions. Moreover, there are certain commodities which people have become too much accustomed to use, for example, betelnut and tobacco. The consumption of such commodities is not much reduced even when their price rise.

Factor # 13. Other Factors:

Besides, the rate of fall in the marginal utility with the increase in consumption, the duration of time limit etc., also determine the elasticity of demand. In the case of commodities having alternative uses, the marginal utility diminishes slowly with the increase in consumption and so in such cases demand becomes relatively elastic. On the other hand, if the marginal utility falls rapidly, as is found in the case of commodities having very little alternative uses, demand becomes relatively price inelastic.

Again, according to George Stigler, “The elasticity of demand for a commodity usually increases with the length of the period of time a price- change persists”. The factors like the difficulties in making immediate adjustment in family budget, imperfections of the market, the time interval for getting the full impact of a price change on the market etc., make the long-run price elasticity usually high.