Main Determinants of Elasticity of Demand

Nature of the commodity

The nature of a commodity determines elasticity of demand. Those products that are necessary in life are generally less elastic. The demand for comfort products have neither very elastic nor very inelastic because changes in prices results to relative changes in demand. Lastly, the demand for luxurious goods is very elastic. A change in price would have a great impact on demand.

Substitutes

The existence of substitutes increases elasticity of demand. When an individual is able to switch from one product to another, the demand of either product becomes elastic. For example, the demand for Coca Cola will be elastic because one can opt for Pepsi instead. However, if there are no good substitutes then demand tends to be inelastic.

Duration of price change

For those good that are non-durable, elasticity of demand is greater in the long run than in the short run. For such good, a consumer may be unable to find substitutes in the short run in the event of a price change, however, over the long run; a consumer can adjust and sought other substitutes. For example, consumers will continue to fuel their cars with gasoline when there is an increase in the prices of gasoline. However, this will happen in the short term.

Income of the consumer

Elasticity of demand is also determined by the income of the consumer. When a consumer has a high income, the elasticity of demand is reduced. This is because, in price will not significantly affect the quantity consumed by such a consumer. On the other hand when a consumer has a low income, elasticity of demand increase, that is, demand becomes more elastic. This is because changes in price will significantly affect demand and supply.

Definition of the market

Broadly defined markets tend to have a less elastic demand as compared to narrowly defined markets. For broadly defined markets, it is easier to find close substitutes to a product than small markets. For example, food is a broad category and because there is substitute for good food, it has inelastic demand. Ice cream on the other hand has is in a narrow category and thus more elastic because one is able to substitute other deserts for ice cream.

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