Wednesday, 20 June 2018

Factors Affecting Elasticity of Demand

Following are the factors affecting the elasticity of demand for a product:

Factors affecting elasticity of demand - Economics

The durability of the product: Perishable goods have inelastic demand as their consumption cannot be postponed. On the other hand, durable goods have elastic demand as their consumption can be postponed (in case the price of that product rises).

Availability of substitutes: Goods having substitutes have elastic demand and vice versa. For example, tea and coffee. They are close substitute. Suppose if there is an increase in price of coffee. In this situation, people can easily shift to tea. So demand of coffee will be quite price sensitive. Change in price of coffee will thus result in meaningful change in its demand. On the other hand if a product has no close substitute/s, its price elaspticity will be relatively inelastic as the consumers can’t swith to any other product in case of increase in price of that particular product.

Habitual Goods: These goods have inelastic demand. For example, cigarettes, alcohol, tobacco etc. If the price of such products increases, the consumers will not reduce the consumption significantly as they are habituated to consume such products.

Income level: The products demanded by people with low incomes tend to have elastic demand. This is because a small increase in the price of any such product will create a significant impact on the monthly budget of people with lower levels of income. On the other hand, products demanded by people with higher levels of income tend to have inelastic demand.

Nature of the goods: Elasticity of demand also depends on whether the commodity is a necessity or a luxury. Goods which are necessities tend to have inelastic demand whereas demand of luxury goods tend to be elastic. People generally prefer not to cut down consumption of necessities even in case of price increase. However, in case of luxury products, a consumer may postpone his decision to buy the product if price is too high thereby making demand of luxury goods more elastic as compared to necessary goods.

Percentage of income spent - Products on which negligible portion of income is spent tend to have inelastic demand. For example salt, match box etc. A price increase in case of such products does not result in decrease in demand of such products. This is because the customers spend a very negligible portion of their income on such products and hence they do not pay much attention to price increase of such products.

Complementary goods: Demand for complementary goods tend to be inelastic. For example, Ink and Ink Pen. An increase in price of ink will not impact the demand of ink too much (as ink is a must in case you are using an ink- pen).

Multiple Usage: Products having multiple usage (like electricity) have elastic demand. This is because if there is an increase in price of such a product, you can reduce its consumption by reducing its usage in some areas. For instance if the price of electricity increases, you may reduce the usage of some electronic products like Air Conditioner or Music System to save electricity.

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