briefly explain three determinants of elasticity of demand.
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Determinants of Elasticity of demand
Demand elasticity measures how sensitive the quantity demanded of a good or service is to changes in other variables. Many factors are important in determining the demand elasticity of a good or service, such as the price level, type of good or service, availability of a substitute and level of consumer income. Following are explained briefly:
1. Nature of the Commodity:
Generally, all commodities can be divided into three categories i.e. Necessaries of Life, Conventional Necessaries, and Luxury Commodities. For necessaries of life, the demand is inelastic because people buy the required amount of goods whatever their price. For example, necessaries such as rice, salt, cloth are purchased whether they are dear or cheap. The demand for conventional necessaries is less elastic or inelastic. People are accustomed to the use of goods like intoxicants which they purchase at any price.
2. Substitutes:
Demand is elastic for those goods which have substitutes and inelastic for those goods which have no substitutes. The availability of substitutes, thus, determines the elasticity of demand. For instance, tea and coffee are substitutes. The change in the price of tea affects the demand for coffee. Hence, the demand for coffee and tea is elastic.
3. Postponement:
Demand is more elastic for goods the use of which can be postponed. For example, if the price of silk rises, its consumption can be postponed. The demand for silk is, therefore, elastic. Demand is inelastic for those goods the use of which is urgent and, therefore, cannot be postponed. The use of medicines cannot be put off. Hence, the demand for medicines is inelastic.
4. Number of Uses:
The elasticity of demand for any commodity depends on its number of use. Demand is elastic; if a commodity has more uses and inelastic if it has only one use. As electricity has multiple uses, if its price falls, it will be demanded more for cooking, heating, industrial purposes etc. But if its price rises, minimum will be demanded for every purpose.
5. Price Level:
The demand is elastic for moderate prices but inelastic for lower and higher prices. The rich and poor do not bother about the prices of the goods that they buy. For example, rich buy Banaras silk and diamonds etc. at any price. But the poor buy coarse rice, cloth etc. whatever their prices are.
Demand elasticity measures how sensitive the quantity demanded of a good or service is to changes in other variables. Many factors are important in determining the demand elasticity of a good or service, such as the price level, type of good or service, availability of a substitute and level of consumer income. Following are explained briefly:
1. Nature of the Commodity:
Generally, all commodities can be divided into three categories i.e. Necessaries of Life, Conventional Necessaries, and Luxury Commodities. For necessaries of life, the demand is inelastic because people buy the required amount of goods whatever their price. For example, necessaries such as rice, salt, cloth are purchased whether they are dear or cheap. The demand for conventional necessaries is less elastic or inelastic. People are accustomed to the use of goods like intoxicants which they purchase at any price.
2. Substitutes:
Demand is elastic for those goods which have substitutes and inelastic for those goods which have no substitutes. The availability of substitutes, thus, determines the elasticity of demand. For instance, tea and coffee are substitutes. The change in the price of tea affects the demand for coffee. Hence, the demand for coffee and tea is elastic.
3. Postponement:
Demand is more elastic for goods the use of which can be postponed. For example, if the price of silk rises, its consumption can be postponed. The demand for silk is, therefore, elastic. Demand is inelastic for those goods the use of which is urgent and, therefore, cannot be postponed. The use of medicines cannot be put off. Hence, the demand for medicines is inelastic.
4. Number of Uses:
The elasticity of demand for any commodity depends on its number of use. Demand is elastic; if a commodity has more uses and inelastic if it has only one use. As electricity has multiple uses, if its price falls, it will be demanded more for cooking, heating, industrial purposes etc. But if its price rises, minimum will be demanded for every purpose.
5. Price Level:
The demand is elastic for moderate prices but inelastic for lower and higher prices. The rich and poor do not bother about the prices of the goods that they buy. For example, rich buy Banaras silk and diamonds etc. at any price. But the poor buy coarse rice, cloth etc. whatever their prices are.
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