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Highlight the determinants of price elasticity of demand

Highlight the determinants of price elasticity of demand

Answers

Faith
1. Availability of close substitutes-The higher the degree of the closeness of the substitutes, the greater the elasticity of demand of the good or service. For instance, coffee and tea may be considered as close substitute for each other. Therefore, 1
percent increase in price of say coffee, would lead to more than proportionate decline in quantity demanded of coffee.

2. Nature of a commodity-Demand for luxury goods (e.g. refrigerator, TV etc) is more elastic because their consumption can be dispersed with or postponed when their prices rise. On the other hand, consumption of necessities (e.g. foodstuffs), essential for life, cannot be postponed and so their demand is inelastic.

3. Proportion of income which consumers spend on a particular commodity-If proportion of income spent on a commodity is large, its demand will be more elastic, and vice versa. A classic example of such commodities is salt, which claims a very small proportion of income whereas clothes and other durable consumer goods claim a large proportion of income.

4. Range of uses of a commodity- The wider the range of uses of a product, the higher the elasticity of demand. As the price of a multi-use commodity decreases, people extend their consumption to its other uses, thereby increasing the demand. For instance, milk can be taken as it is, it may be converted into cheese, ghee and butter. The demand for milk will therefore be highly elastic.

5. Habit: some goods are consumed because of habit e.g. smoking; in this case we find that price changes leave quantity demanded more or less unaffected. In this case their demand is said to inelastic.
Faimus answered the question on January 16, 2019 at 19:15

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