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9 Main Determinants of Price Elasticity of Demand – Explained!

What Are the Major Determinants of Price Elasticity of Demand?

❶For example, if cement, bricks, wood and other building materials become costlier, people will postpone the construction of houses.

What Is Price Elasticity?

Determinants of Elasticity of Demand

The availability of close substitutes. If a product, such as salt, is very inexpensive, consumers are relatively indifferent about a price increase. Therefore, salt has a low price elasticity of demand. Therefore, cars have a higher price elasticity of demand.

The period of time under consideration. Price elasticity of demand is greater if you study the effect of a price increase over a period of two years rather than one week. Over a longer period of time, people have more time to adjust to the price change. If the price of gasoline increases considerably, buyers may not decrease their consumption much after one week. However, after two years, they have the ability to move closer to work or school, arrange carpools, use public transportation, or buy a more fuel-efficient car.

If a government increases the sales tax on a product by 50 cents, does that mean that the equilibrium price of the product will increase by 50 cents? The answer is no. Typically, the equilibrium price will increase less than 50 cents. This means that the cost of supplying the gasoline increases by 50 cents.

In the graph below, the supply curve shifts leftward. Note that the vertical difference between supply curve S1 and supply curve S2 is 50 cents the increase in the cost of supplying the gasoline. The equilibrium price, however, did not increase by 50 cents, because the demand curve is sloped at an angle. The burden of any tax is typically shared between consumers and suppliers. In the graph below, the tax is shared equally as the price increases by 25 cents. Complementarity between Goods 5.

Of all the factors determining price elasticity of demand the availability of the number and kinds of substitutes for a commodity is the most important factor. If for a commodity close substitutes are available, its demand tends to be elastic. If the price of such a commodity goes up, the people will shift to its close substitutes and as a result the demand for that commodity will greatly decline.

If for a commodity substitutes are not available, people will have to buy it even when its price rises, and therefore its demand would tend to be inelastic. For instance, if the prices of Campa Cola were to increase sharply, many consumers would turn to other kinds of cold drinks, and as a result, the quantity demanded of Campa Cola will decline very much.

On the other hand, if the price of Campa Cola falls, many consumers will change from other cold drinks to Campa Cola. Thus, the demand for Campa Cola is elastic. It is the availability of close substitutes that makes the consumers sensitive to the changes in the price of Campa Cola and this makes the demand for Campa Cola elastic. Likewise, demand for common salt is inelastic because good substitutes for common salt are not available. If the price of common salt rises slightly, the people would consume almost the same quantity of salt as before since good substitutes are not available.

The demand for common salt is inelastic also because people spend a very little part of their income on it and even if its price rises it makes only negligible difference in their budget allocation for the salt. The greater the proportion of income spent on a commodity, the greater will be generally its elasticity of demand, and vice versa.

The demand for common salt, soap, matches and such other goods tends to be highly inelastic because the households spend only a fraction of their income on each of them. On the other hand, demand for cloth in a country like India tends to be elastic since households spend a good part of their income on clothing.

If the price of cloth falls, it will mean great saving in the budget of many households and therefore they will tend to increase the quantity demanded of the cloth. On the other hand, if the price of cloth rises many households will not afford to buy as much quantity of cloth as before, and therefore, the quantity demanded of cloth will fall.

The greater the number of uses to which a commodity can be put, the greater will be its price elasticity of demand. If the price of a commodity having several uses is very high, its demand will be small and it will be put to the most important uses and if the price of such a commodity falls it will be put to less important uses also and consequently its quantity demanded will rise significantly.

If its price rises to a very high level, it will be used only for essential purposes such as feeding the children and sick persons. If the price of milk falls, it would be devoted to other uses such as preparation of curd, cream, ghee and sweets. Therefore, the demand for milk tends to be elastic. Complementarity between goods or joint demand for goods also affects the price elasticity of demand.

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Price elasticity of demand has four determinants: product necessity, how many substitutes for the product there are, how large a percentage of income the product costs, and how frequently its purchased, according to Economics Help.

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The main determinants/factors which determine the degree of price elasticity of supply are as under: (i) Time period. Time is the most significant factor which affects the .

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Determinants of Elasticity of Demand Apart from the price, there are sever Apart from price, there are several factors that influence the elasticity of demand. The Elasticity of Demand is a measure of sensitiveness of demand to the . The price elasticity of demand (PED) is a measure that captures the responsiveness of a good’s quantity demanded to a change in its price. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand are held constant.

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The more something is considered a 'luxury' the more the price elasticity of demand. Electricity is a necessity so not as affected. However, a vacation is a luxury and could be done without and you won't suffer without a vacation. Determinants of Price Elasticity of Supply A numeric value that measures the elasticity of a good when the price changes.-availability of materials - The limited availability of raw materials could limit the amount of a product that can be produced.