Question

List and explain the determinants of the price elasticity of demand and supply.

Answer 1

Determinants of price elasticity of demand are -

1) Presence of substitute of a good - The demand of a good will be elastic if it has close substitutes . With the increase in price of good , the customer will move to its substitute causing fall in demand for a good. The more , the chances of substitution , the higher is price elasticity of demand.

2) The part of income , consumer want to spent - If the consumer spents large part of income , the elasticity will be more and if less part of income is spent , the elasticity will be less.

3) Commodity can be used for how many purposes - If the commodity can be used for various purposes , it will be more elastic demand . With in increase in prices of goods with multiple uses , demand will fall and if the price of goods with multiple purposes falls ,it's demand will increase.

4) The goods with complementary nature - The goods of complementary nature effects the price elasticity of demand. Household goods with complementary nature doesn't change much with increase or decrease in prices because they are used in combination with other good so prices will be inelastic. Example - salt will have inelastic demand as it used in combination with others

5) Time factor - In longer time period , the price elasticity of demand will be more elastic as consumer has the option of substitution which is not present in case of short time period.

Determinants of price elasticity of supply are -

1) Time factor - In longer period , with increase in prices of goods , the producer can make changes in output level so it will have more elastic supply of goods.In short period , the producer don't have much time to make changes in production , so elasticity of supply will be inelastic.

2) Capacity to store goods - If the goods can be stored safely , it's supply will be elastic and in case of perishable goods or good with not storage , the supply will be not be elastic.

3) Mobility of factors - The price elasticity of supply will be effected by mobility factor . The goods will have higher elasticity if they can move from one purpose to other easily.

4) Surplus supply - If there is surplus capacity , then with the increase in prices , the producers can expand its production so it will result in more elastic supply. In case , producer is already utilising it's resources to maximum level , the supply will not be effected by increase in prices in short period ,so supply is more inelastic.

5) Accessibility of infrastructure - If with the increase in prices, the production can be increased because of availability of infrastructure then supply will be more elastic.