Elasticity of Demand

• Price elasticity of demand refers to the sensitivity of demand for a good in response to a change in its own price. The factors which affect price elasticity include the following:
• The availability of close substitutes at competitive prices is the greatest single influence on price elasticity of demand. Goods are purchased because they provide utility, if there are other goods available at comparable prices which provide more or less the same utility consumers will switch to buying these substitute goods if the price of the good in question is increased more than the price of substitute goods. Similarly if the price of a good is reduced relative to the price of substitute goods the consuming public will switch to buying the good which has become relatively cheaper. The closer the degree of substitutability the more will consumers tend to switch their purchasing behaviour in response to a change in relative prices and consequently the greater will be price elasticity.
• If the good in question is one of two goods which are in joint demand then this complementarity affects price elasticity of demand for the good. Reductions in the price of complementary goods will increase the demand for the good in question e.g. a reduction in the price of motorcars will increase the demand for petrol. If the good in question is the cheaper of two goods which are in joint demand, then the demand for it is likely to be relatively inelastic in response to changes in its own price.
• The proportion of income which is spent on the commodity also affects it elasticity. In general the greater the proportion of a person’s income which is spent on a good the greater will be that person’s price elasticity of demand for the good. The reason for this is that the greater the proportion of your income which you spend on the goods the more significant to you is a change in its price.
• The more durable the commodity the more elastic is the demand for it likely to be in response to changes in its own price. This is because it is easier to postpone the purchase of such goods by extending the life of the existing model. Examples of such goods are refrigerators, bicycles, lawnmowers. The expectations of consumers as to future price changes will affect elasticity. No matter what is happening in respect of current prices if consumers expect prices to be lower in the future they will refrain from buying in the present conversely they will bring forward their purchasing if they expect prices to be even higher in the future.



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