Relation between Elasticity of Demand and Consumer’s Surplus

There is a close connection between elasticity of demand and consumer’s surplus.

We know that the demand for necessaries of life is relatively inelastic. Whatever their price, we must buy’ them.

For necessaries, therefore, we are prepared to pay much more than we actually have to pay, as they are generally cheap.

Hence, in such passes there is a large consumer’s surplus, for consumer’s surplus is equal to the difference between what the consumers are willing to pay and what they actually have to pay. For luxuries, we are not prepared to pay much more than we are paying actually. For them our demand is elastic. The consumer’s surplus in such cases is small. We may, thus, conclude that the consumer’s surplus is large when demand is inelastic and small when it is elastic.

Determinants of Elasticity:

Whether the demand for a commodity is elastic or inelastic or more elastic or less elastic depends on a number of factors. You cannot straight-away say that the demand is elastic or inelastic. All these factors must be taken into account before we can say whether the demand is elastic or inelastic.

The following are the chief factors on which elasticity of demand for a commodity depends:

For necessaries, the demand is less elastic or comparatively inelastic. We must buy them, whatever be the price. The price may rise or fall but the demand will remain practically the same. For luxuries, on the other hand, the demand is more elastic.

A little fall in their price stimulates the demand and a little rise discourages it. Hence, in such cases, demand extends and contracts considerably when the price falls and rises respectively. The demand is elastic. But it should, be remembered that necessaries and luxuries are relative terms. What is luxury for one may be a necessary for another. Thus, for the same commodity the demand may be elastic for some people and inelastic for other people. Hence, it is necessary to refer to the class of people with respect to whom the demand is elastic or inelastic.

Existence of Substitutes:

For commodities having substitutes, the demand is elastic, e.g., tea and coffee. If the price of any one of them falls, it will be purchased in larger quantities. If the price rises, demand for it will contract, and its substitutes will be purchased instead. There is, therefore, greater extension or contraction of demand for such commodities when their prices change. Demand for them is elastic.

Several Uses:

When a commodity has several uses, demand for it is elastic. With a fall in price such a commodity tends to be put to less urgent uses. Thus its demand extends, and vice versa. If a commodity has only one use, a change in price of the commodity will influence its one use only. Even if its price falls considerably, it cannot be put to any other use. Hence the demand is inelastic. But if it is possible to use it for a number of purposes, the demand will be obviously elastic.

It may also be borne in mind that the demand for a commodity may be elastic for one use and inelastic for another. For example, the demand for coal for use in railway engines is inelastic because there is no alternative; it is essential to use coal for this purpose. But its use for domestic purposes is not so essential. More of it will be used only if its price falls. Hence for domestic use the demand for coal is elastic.

Possibility of Postponement:

When we can postpone buying a commodity, the demand is elastic. More is purchased when the price falls, and less when it rises. For instance, if the price of warm suiting goes up its demand will considerably contract because its purchase can be conveniently postponed. If it becomes cheap, demand will extend.

Range of Prices:

Elasticity of demand depends also on the level of prices, if price is too high or too low, the demand will be comparatively inelastic. For moderate prices it is elastic. When the prices are already too high or too low, a small change in them will not affect the demand much. Take the case of a transistor It is becoming very popular. But whether the demand for it is elastic or inelastic will depend upper the range of prices. If the price of a transistor is near-about Rs. 1,000, a fall in its price by about Rs. 100 or so will not affect its demand much.

In other words, the demand will be inelastic. Now take the other extreme. If its price is Rs. 50, everybody who is interested will have purchased it and a fall in price will not lead to any extension of demand. Hence the demand is again inelastic. But if the price is Rs. 250-300, the demand will be elastic. Thus, the demand is inelastic when the price is too high or too low but elastic in the middle range of prices.

Proportion of Income Spent:

Another factor on which elasticity of demand for a commodity depends is the proportion of one’s income spent on the commodity For instance, a person spends a small amount out of his income on a newspaper. Any change in its rate will not materially affect its demand. In other words, the demand is inelastic. But quite a large sum of money is spent on milk. If, therefore, price of milk rises, less of it will be purchased and if its price falls, more will be purchased, i.e., the demand is elastic.

Conclusion:

From the above, it will be clear that there is no hard and fast rule to determine whether the demand for any commodity is elastic or inelastic. This will, in fact, depend on several factors connected with that commodity and with the consumer. However, broadly speaking, we may say that the elasticity of demand for any commodity in relation to a certain class of consumers will depend on the availability of its substitutes or the nature of the commodity whether it is a necessary or a luxury.