What factors affect elasticity of demand. 9 Factors Influencing the Elasticity of Demand 2022-10-28
What factors affect elasticity of demand Rating:
Elasticity of demand refers to the degree to which the quantity demanded of a good or service changes in response to a change in its price. The concept of elasticity is important for businesses and policymakers to understand, as it helps to predict how changes in price will affect a company's profits and the overall level of economic activity in an economy.
There are several factors that can affect the elasticity of demand for a good or service:
The availability of substitutes: The more substitutes that are available for a good or service, the more elastic the demand for that good or service will be. This is because consumers will have more options to choose from if the price of the good or service they normally buy increases, and they will be more likely to switch to a substitute.
The percentage of income that the good or service represents: If a good or service represents a large percentage of a consumer's budget, the demand for that good or service will be more elastic. This is because consumers will be more sensitive to changes in price and will be more likely to reduce their consumption if the price increases.
The time frame being considered: The longer the time frame being considered, the more elastic the demand for a good or service will be. This is because consumers have more time to adjust their behavior and find substitutes if the price of a good or service increases over a longer period of time.
The necessity of the good or service: Necessities such as food and healthcare tend to have inelastic demand, meaning that the quantity demanded does not change significantly in response to changes in price. On the other hand, luxury goods and services tend to have more elastic demand, as consumers are more likely to reduce their consumption if the price increases.
The level of consumer knowledge and information: If consumers have a lot of information about a good or service and the substitutes available, the demand for that good or service will be more elastic. This is because consumers will be more aware of their options and will be more likely to switch to substitutes if the price of the good or service they normally buy increases.
In conclusion, elasticity of demand is a measure of how responsive the quantity demanded of a good or service is to changes in its price. The elasticity of demand can be affected by the availability of substitutes, the percentage of income that the good or service represents, the time frame being considered, the necessity of the good or service, and the level of consumer knowledge and information. Understanding these factors can help businesses and policymakers make informed decisions about pricing and economic policy.
9 Major Factors which Affects the Elasticity of Demand of a Commodity
Hence, the elasticity of demand in such cases should have to be carefully expressed. Time Period The price elasticity of demand varies directly with the time period. ADVERTISEMENTS: Thus, whether the demand for a commodity is elastic or inelastic depends on various factor. The change in prices does not bother people from such groups. 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.
Here, we must keep in mind that luxury is a relative term, which varies from person to person, place to place and from time to time. The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly inelastic, inelastic, and unitary. In economics goods are classified into three categories, namely, necessities or essential goods , comforts, and luxuries. The given time period can be as shorts as a day and as long as several years. Creditors kept coming after me and putting all to my credit report; this really caught up with me and kept drowning my credit score.
Hence, the demand for coffee and tea is 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. . ADVERTISEMENTS: Commodities which last a long time, i. .
It can be a day, a week, a month, a year or a period of several years. The reason stated for this is the redundant human nature to change habits. Range of substitutes: The commodity which has more number of substitutes has relatively elastic demand. For example, what is a luxury to a poor man is a necessity to the rich. I applied for a loan in April.
What Factors Influence a Change in Demand Elasticity?
Some goods are more sensitive or elastic while some are less. Other Factors: Besides, the rate of fall in the marginal utility with the increase in consumption, the duration of time limit etc. Consumer Income: The income of the consumer also affects the elasticity of demand. He also said he loved me so much. People are accustomed to the use of goods like intoxicants which they purchase at any price. He helped me remove hard inquiries and raise my credit score to 801 excellent within a few days.
9 Factors That Influence Price Elasticity of Demand
For example, necessaries such as rice, salt, cloth are purchased whether they are dear or cheap. What are the factors affecting supply? Income Levels Our society is divided into different classes based on incomes and lifestyle. Number of its Uses: Single-used goods will have less elastic demand as compared to multi-use goods. Income levels have a considerable effect on the elasticity of demand. The Availability of Substitutes: Commodities which have good substitutes have an elastic demand. 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.
5 Factors Affecting the Price Elasticity of Demand (PED)
For example, if the price of salt is raised by 50%, the demand would still be inelastic as consumers would keep on purchasing. The larger the number of close substitutes of a good available in the market, greater the elasticity for that good. Similarly, if products such as medicines are to be used in an emergency, the demand for them would not decrease. 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. The reason is that when the prices of such commodities increase people can postpone purchases.
Luxury articles have an elastic demand. Demand is inelastic for those goods the use of which is urgent and, therefore, cannot be postponed. Close substitutes for a product affect the elasticity of demand. Habits: If consumers are habituated of some commodities, the demand for such commodities will be usually inelastic. For example, a laptop may be a luxury product for an ordinary individual, while a necessity for a computer engineer. 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.