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As the price of any commodity goes down, people start
purchasing more quantity of it and as the price goes up,
they purchase lesser of it. But the problem is how much
of change in price leads to how much change in quantity
demanded ? If this problem is solved the seller would
know how much of a quantity to be placed in the market
with the respective change in price.
The concept of elasticity of demand solves this problem.
It helps to measure the change in quantity demanded
due to a given change in price. The concept is of great
utility for producers, sellers, government, etc.
What is demand
It is defined as proportionate change in quantity
demanded to proportionate change in price .
Price elasticity of demand measures the
responsiveness of demand of a commodity
to a change in its price .
Factors Affecting Elasticity Of
Nature of commodity
Availability of close substitute
Number of uses
Proportion of total expenditure spent on the product
Level of income Income of consumer
Consumer expectations about future prices and income
Availability of Close Substitutes
Good having number of close substitutes will have an
Good with no close substitute will have an inelastic
Nature of commodity
Necessities - Less elastic
Comforts - Elastic
Luxuries - More elastic
Number of uses
More the number of uses a commodity can be put
to More elastic is the demand and vice versa.
Proportion Of Total Expenditure Spent
Larger the proportion of total expenditure spent on a goods
higher will be the elasticity and vice versa.
Level Of Income
Higher the level of income, lower the elasticity of demand and
Some products which are not essential for some individuals are
essential for others. If individuals are habituated of some
commodities the demand for such commodities will be usually
inelastic, because they will use them even when their prices go up. A
smoker generally does not smoke less when the price of cigarette
goes up. If you are habituated to a particular goods, elasticity will be
less and vice versa.
Longer the time period, higher the elasticity and vice-versa. In the
long period, the customer has sufficient time to wait for fall in
price and therefore demand changes when the price of the
commodity changes. In the short-time period there is no time to
wait for price change. He has to purchase what ever price is
available and therefore demand is less elastic.
If a consumer believes that the price of the goods will be
higher in the future, he/she is more likely to purchase the
goods now. If the consumer expects that his/her income will
be higher in the future, the consumer may buy the goods now.
Consumer expectations about future prices
Population : If the population grows this means that
elasticity of demand will also increase.
From all the analysis above, the aggregate increase in quantity demanded for an inferior goods
during a price fall is less than that of the normal goods due to the negative income effect of the
inferior goods (an increase in relative income or real purchase power leads to a decrease in
consumption). As for elasticity of demand, since income effect diminishes the aggregate
increase in quantity demanded for an inferior goods during a price fall, an inferior goods is less
elastic in demand than a normal goods. However, this paper did not discuss how other factors
may also affect elasticity of demand such as availability of substitutes, time period to be
considered, etc. Generally speaking, knowing whether a goods is inferior or normal can help
predict the possible changes to consumer behavior, when there is a change in price, hence,
minimizing the risk associated with any pricing strategies. For the same token, we can as well
categories goods after experiencing the results in demand with a price change.