Question

Question: What are the main influences on the elasticity of demand that that makes the demand for some goods elastic and demand for another goods inelastic? What are the main influences on the elasticity of supply that make the supply of goods elastic and the supply of other goods inelastic? Chapter 5

Answer 1

Elasticity of demand refers to the extent of changes in demand of a particular product or service in response to a given change in price of that particular product or service.

The main factors influencing the demand elasticity may be summarized as follows-

1. Extent of changes in price-

Smaller price changes generally do not have much impact on demand however significant changes i.e. above 5% have the potential to effect much changes on the quantity demanded.

2. Nature of the product-

Essential goods which are needed in daily life tend to have lower elasticity than luxury goods. For example the demand for common salt would be relatively inelastic while demand for luxury cars are highly elastic.

3. Availability of substitute products and services-

Goods or services for which subsititutes are easily available tend to have high demand elasticity as even smaller changes in price may prompt buyers to switch to substitutes.

4. Income of the consumer-

With increase in income, consumers tend to demand more luxury goods while the demand for necessities remains constant implying low demand elasticity for necessities while high elasticity for luxury goods in response to changes in income.

The main factors influencing elasticity of supply of goods or services may be summarized as follows-

1. Number of Suppliers-

Other things constant, In a market with large number of Suppliers, the Supply of the product would be relatively inelastic as the individual supplier is not able to affect the quantity supplied. While in market conditions where there are few suppliers, individual supplier has the potential to effect significant changes in total supply of the product.

2. Availability of input materials-

Availability of input materials has potential to effect changes in total supply of the product as they are the key component of the product. For example the availability of Active Pharmaceutical Ingredients(API) has much bearing on elasticity of drug supply.

3. Quantitative controls on manufacturing and supplies-

Many a times national governments and industry associations put quantitative restrictions on the supplies or manufacturing of particular product or service making supplies highly inelastic or elastic. For example OPEC puts restrictions on supply of crude oil.