Factors Determining Elasticity of Demand
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Factors Determining Elasticity of Demand

Factors Determining Elasticity of Demand There are several factors which determine the elasticity of demand. (i)For necessaries and conventional necessaries the demand is inelastic or less elastic- We have to buy these commodities whatever be the price. A change in price, therefore, does not matter so far as the demand for such commodities is concerned. Salt is one such thing and wheat another. But in a poor country like India-even the demand for such things is somewhat elastic.

Factors Determining Elasticity of Demand

There are several factors which determine the elasticity of demand.

(i) For necessaries and conventional necessaries the demand is inelastic or less elastic- We have to buy these commodities whatever be the price. A change in price, therefore, does not matter so far as the demand for such commodities is concerned. Salt is one such thing and wheat another. But in a poor country like India-even the demand for such things is somewhat elastic. The change in the price of wheat may be immaterial for upper and middle classes, but its consumption will certainly increase among the poor when its price falls.

(ii) Demand for luxuries is elastic- When the price of luxuries falls; people buy much more of them, and when the price raises the demand contracts. But luxury is a relative term. A high-priced luxury of the poor man is a low-priced necessary for the rich. For the same thing demand of the lower classes may be elastic and that of the rich classes less elastic.

(iii) For substitutes the demand is also elastic- For example, when price of tea rises, we may buy less of tea but more of coffee, and vice versa. We must, however, remember that very few things can serve as suitable substitutes.

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(iv) Demand for goods having several uses is elastic-Coal is such a case. When cheap, its use for less urgent needs will extend and when the price goes up, it will be put only to more urgent uses, and its demand will contract

(v) Demand for goods the use of which can be postponed is elastic-When, for example, the building material is very costly, and building activity is very much reduced. The demand has contracted. When cheap material becomes available, the demand will extend.

(vi) Elasticity also depends on the price level-If the price is either too high or too low, the demand will be less elastic. When the prices are moderate, elasticity will be greater.

(vii) The same commodity may have inelastic demand for certain uses and elastic for certain other uses-For example, wheat as human food has inelastic demand, but its demand as cattle feed is elastic.

(viii) Proportion of total expenditure allocated for the commodity- If the proportion of total expenditure devoted to a commodity is small, the demand for it tends to be inelastic. For example, the percentage of budget devoted by a typical household to soap, salt and ink is quite small and consequently the demand for these goods is relatively inelastic.

(ix) Habit and fashion- The demand for those goods which are habitually consumed or which are in fashion is inelastic. The reason is that such commodities become more or less a necessity for the consumer

(x) Future expectations about price changes-The future expectations about the price of any commodity also influence the elasticity of demand for it. For instance, if the price of any commodity is expected to rise in future, then a small decrease in its price will produce a considerable increase in its price.

(xi) The state of joint demand-In case of commodities having joint demand, the elasticity of demand for a good depends upon the elasticity of demand for other jointly-produced goods. For example, if the demand for cars increases, the demand for petrol will also increase with the same rapidity as the demand for cars does.

Examples of Elasticity

Recently, health articles and certain so-called nutrition experts came out extolling the wonderful health benefits of everything coconut, especially coconut oils and coconut butter. That coconut contained healthier fats than other butters or oils and should be used for everything from treating yeast infections to lowering the bad cholesterol.

The sale of coconut products like coconut water, butter, and oils soared. And then more accurate studies came out stating that coconut fat was really no healthier than other oils and fats and the sales have started to fall.

This type of elasticity is the function of fad more than anything else, and the price reflected this.

How Joint Demand can Cause the Invention of New Products

Using oil and gas again for an example of elasticity and how it can change the future and cause a change in the elasticity of other products.

During oil shortages in the 1970s and 1980s and sporadically in the 21st century, companies started to come out with many new solar products. People started buying solar for their homes in order to decrease their utility cost and help clean the air.

Even more importantly, oil and gas shortages cause the price of oil and gas to go up quickly. Recently, this situation has cause a rapid increase in the production and sales of electric cars and hybrid cars that are mainly electric, drastically reducing the need for expensive gas.

Conclusion

These are only broad rules. But it is not possible to lay down any hard and fast rules as to which commodity has an elastic and which an inelastic demand. It all depends on the circumstances of the case.

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