Write a short note on Factors affecting price elasticity of demand.
Elasticity of demand differs from commodity to commodity. Not only that, elasticity of demand of the same commodity may be different for different persons.
List of Factors Affecting Price Elasticity:
Nature of the good : Generally in case of necessities their demand is inelastic and that of comforts and luxuries, the demand is more elastic. This is so because certain goods which are essential to life will be demanded at any price, whereas goods meant for luxuries and comforts can be dispensed with easily if they appear to be costly.
Availability of substitutes : The greater the availability of close substitutes, the greater will be the price elasticity of demand of the good in question. For example, if price of Santro car increases, then demand for Zen or Indica will rise. On the other hand, the demand of such commodities is inelastic, which have no substitutes such as salt.
Percentage of total expenditure : The demand for such commodities where a small part of the income is spent, is generally inelastic. Examples are needle, thread, buttons etc. On the contrary, the demand of such commodities where a significant part of income is spent, is very elastic, such as the demand for woolen suits, luxuries etc.
Various uses : In general, a commodity which has several uses will have an elastic demand. On the other hand, a commodity having only one use will have an inelastic demand.
Postponement : The demand of such commodities such as car whose consumption can be postponed for sometime in future is considered to be somewhat elastic. Whereas, demand for daily use goods such rice, wheat, bread which cannot be postponed, is inelastic.
Habits of the consumer : If consumers are habituated of some commodities, the demand for such commodities will be usually inelastic because they will use them even when their prices go up. A smoker continues smoking even when price of cigarette goes up.
Joint demand : In the event of a commodity being jointly demanded such as car and petrol, its elasticity will be directly governed by the elasticity of other commodities which are jointly demanded. For example, if the demand for car is inelastic, the demand for petrol will also be inelastic.
Time for adjustment in purchases : Demand for a commodity always exist in some specific period of time, Say, a day, a week, a month, a year, etc. Elasticity of demand varies with the length of time. A demand is more elastic longer the period of time because longer the period of time, the greater is the case of substitution for both consumers and producers.
Fashion tastes and preferences of consumers : Elasticity of demand is also affected by the tastes and preferences of the consumers and the fashions in vogue. Consumers have their own preferences for different brands of tea, soaps, talcum powder and do not easily switch over to other brands even if the prices of the brands they use increase considerably. Thus, their demand for their particular brands are inelastic over a wide price -range. Fashion also affects elasticity.