Thus the change (rise or fall) in price can’t influence the demand. The more the number and variety of uses of a good, the more would be its elasticity of demand. The examples of such a good are building materials like cement, iron rods, etc. Boston Spa, Factors affecting price elasticity of demand. Prepared By:- KVS, Delhi Region DEFINITION • It is defined as proportionate change in quantity demanded to... 3. This means it is different in the long run and the short run. They spend a greater amount of their income on the purchase of necessaries of life such as wheat, milk, course cloth etc. It may concluded that the more the number of close substitutes for a particular good, the more would be the price-elasticity of demand for the good. Role of Habits 6. The factors that determine the price elasticity of demand for a good are: substitute goods - if a good has many substitutes, a change in its price will have a major impact on its demand. Therefore, demand for coffee would be relatively more elastic because of the availability of tea. Prepared By:- KVS, Delhi Region FACTORS AFFECTING ELASTICITY OF DEMAND 2. The elasticity of demand for a necessary good is relatively small. Factors Affecting Price Elasticity of Demand Relative need for the product. Let us understand the concept of price elasticity of demand with the help of an example.. Price Elasticity of Demand Example: Assume that a business firm sells a product at the price of 450. It can be a day, a week, a month, a year or a period of several years. The following points highlight the seven main factors affecting the price elasticity of demand. There are three types of commodities: Necessaries, Comforts and luxuries. Availability of Substitute Goods 3. Not only that, elasticity of demand of the same commodity may be different for different persons. Factor # 1. For example, an increase in prices of any product would not affect the demand for products consumed by a … The firm has decided to reduce the price of the product to 350. Just one day without electricity, a big city can turn into a living hell. On the other hand, if they spend a large proportion of their income on a good, then its elasticity of demand would be relatively high. Remember, demand has an inverse relationship with prices. Number and Variety of Uses of the Product 4. These include luxury assets such as jewelry and cars. What are the factors affecting the price elasticity of demand? Nature of product on sale. This short revision video looks at eight factors that can influence the coefficient of price elasticity of demand (PED) for different products.- For, when the price is very small, a change in price would have no considerable effect on demand. April 02, 2012 Share Get link; Facebook; Twitter; Pinterest; Email; Other Apps; Labels Explanatory Notes Factors Price Elasticity of Demand Theme 03: How the Market Works Topic 11: Elasticity of Demand and Supply. Microeconomics, Demand, Elasticity, Price Elasticity of Demand. Uses of the Commodity influence Elasticity of Demand. Factors Affecting Price Elasticity of Demand Factors Affecting Price Elasticity of Demand As discussed earlier, the price elasticity of demand of a product reflects the change in the quantity demanded as a result of a change in price. Labour costs as a % of total costs: When labour expenses are a high % of total costs, then labour demand is more wage elastic. Price elasticity of demand is always related to a period of time. Role of Habits 6. Availability of substitute goods. Widget Inc. decides to reduce the price of its product, Widget 1.0 from $100 to $75. Acts as a crucial factor in influencing the price elasticity of demand. Learn more ›. One factor that can affect demand elasticity of a good or service is its price level. Own-price elasticity of demand (OED) = % Changes in quantity demanded of goods X /% Changes at the price of goods X. 8 factors affecting price elasticity of demand 1. Boston House, Factors affecting Price Elasticity of Demand and Cross Price Elasticity According to (Hubbard, Garnett et al. Factors affecting elasticity of demand 1. On the other hand, when its price falls its demand do not considerably increase because it had already been purchasing (at the previous price) almost all that it needed, since it is a necessity to us. Sometimes some people completely surrender to the consumption of articles of addiction like drugs, alcohol and tobacco products. But, elasticity of demand for a luxury good is generally high. Price of the Good. Fax: +44 01937 842110, We’re proud to sponsor TABS Cricket Club, Harrogate Town AFC and the Wetherby Junior Cricket League as part of our commitment to invest in the local community, Company Reg no: 04489574 | VAT reg no 816865400, © Copyright 2018 |Privacy & cookies|Terms of use, Live Lesson Replay | A-Level Economics | Elasticities | Feb 2021, Price Elasticity of Demand - Revision Playlist, Introduction to Economics and the Operations of Markets - take the Yes/No challenge, Elasticity of Supply of Different Products, Supply and Price Elasticity of Supply - "Reach the Peak" activity, Price and Income Elasticities - "Match Up" Activity, Calculating Cross Price Elasticity of Demand, Demand and Supply - 60 Second Challenge (Knowledge Retrieval Activity), Price Elasticity of Supply (Evaluation of Factors), Elasticity of Demand and Supply - Know Your Stuff! It is concluded then that if the buyers spend a small proportion of their income on a good, then its price-elasticity of demand would be relatively small. 214 High Street, The company predicts that the sales of Widget 1.0 will increase from 10,000 units a month to 20,000 units a month. Number and Variety of Uses of the Product 4. Factors Influencing Elasticity of Demand 1. On the other hand less durable or perishable goods are consumed repeatedly. Availability of Substitute Goods 3. West Yorkshire, Why is it that demand for some goods is elastic while the... 2. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas. 1) The availability of substitutes: The greater the number of substitutes, the more elastic the good. Let’s look at some of the 7 factors that influence income elasticity of demand. But in case of luxuries products the demand varies with the change in the price. Price level: Generally, the demand for very costly and very cheap goods is elastic. Therefore, demand for luxury goods would be relatively more elastic. Generally, the smaller the price of a good, the less is the elasticity of its demand. Also, at different prices of the product, i.e., at different points on the demand curve for a good, the coefficient of price-elasticity of demand for the good would be different. Share Your PDF File
For example, rice is very much a necessary good to us, and so its demand cannot be reduced considerably when its price rises. Nature of commodity: Elasticity of demand of a commodity is influenced by its nature. The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a necessary or a luxury good. As consumers can easily switch to consuming other goods if the price of one good rises. Elasticity of demand differs from commodity to commodity. Nature of the commodity is the most important factor that affects the price elasticity of demand. These differences in elasticity of demand are due to various causes, which are discussed below: 1. The price-elasticity of demand for a good also depends on the proportion of their income the buyers spend on the good. Necessaries are those goods which are mandatory for survival of human being. Consumers will turn to the substitute goods instead of buying a good that suddenly has become more expensive. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. Share and Like article, please: Categories Economics Tags demand, elasticity. 2016) there are factors that can determine whether one product is elastic or inelastic. Some goods are more sensitive or elastic while some are less. An increase in price decreases the quantity demanded, and in contrast, a reduction in price increases the quantity demanded. However, the price elasticity differs for different products as it depends on various factors. Much cheaper & more effective than TES or the Guardian. The elasticity of demand for a good also depends on its own price. Availability of raw materials is one of the important factors affecting the elasticity of supply. Proportion of Income Spent on the Good 5. The above are the 6 factors affecting the elasticity of demand. He has over twenty years experience as Head of Economics at leading schools. Nature of the Good 2. Regardless of the price increase, people will keep using it. 9 Major Factors which Affects the Elasticity of Demand of a Commodity | Economics 1. Types of Elasticity of Demand 1) Price Elasticity of Demand It is defined as responsiveness and sensitivity of a particular product along with the... 2) Income Elasticity of Demand Income is one of the factors that influence the demand for a product. For, when the price is relatively large, a further rise in price would have a considerable dampening effect on demand and a fall in price would have an encouraging effect on demand. A commodity for a person may be... 2. Demand is generally inelastic in the short period. If a consumer has high income, then the demand for products consumed by him/her would be inelastic. For example, since tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea. Price elasticity of supply depends upon the tenure of the production. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Proportion of Income Spent on the Good 5. Topic 11: Elasticity - Factors affecting Price Elasticity of Demand By Ahmed Xahir. These factors which influence price elasticity of demand, in brief, are as under: (i) Nature of Commodities. Is the product necessary or luxury? Factors affecting the wage elasticity of demand for labour. Price elasticity on the first demand curve in Panel (A) is unity, for ∆q/∆p = 1. Privacy Policy3. Welcome to EconomicsDiscussion.net! Again, conversely, if the price of coffee decreases, then people might reduce their consumption of tea and they might considerably increase their use of coffee. That is why if the price of such a good increases, the demand for the good can be considerably reduced. The factors are: 1. Factors Affecting Price Elasticity of Supply • Factors that affect price elasticity of supply: • (1) Flexibility and mobility of inputs • - More flexible and mobile of inputs, more elastic • (2) Availability of production capacity • - More production capacity available, more elastic • (3) Adjustment time • - Longer time period for adjustment, more elastic
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