Question

Please list and discuss in detail the six forces that determine whether a Demand curve is price elastic, or price inelastic. What does it mean for a Demand curve to be price elastic, exactly? What happens when the sellers raise the price of a product by ten percent on a demand curve that is price elastic?

 

Answer 1

Factors affecting price elasticity of a demand curve:

1. price of the good
2. Availability of substitute good.
3. Habits
4. Type of good
5. Urgency of consumption
6. Time period

​​​​​​​​Price of good : the most common factor which determines whether a demand curve of a given good is elastic or not is price. When price changes and the change in quantity demanded is less than it, this shows that the demand curve is inelastic. Elastic demand curve has a higher change in quantity demanded with respect to change in price.

Availability of substitute goods: substitute goods are those goods which can be interchangeably used with it's corresponding good for instance petrol and diesel, tea and coffee etc. When there are more substitute good for a commodity , it's demand curve will have higher elasticity compared to good with few substitute.

Let's say a person is fond of eating fruits. The price of apple rises to $1/ kg and the person decrease the demand for apples from 10kg to 2 kg and switchs to pear . This shows that change in price is causing change more change in quantity demanded . Thus here price elasticity of demand curve for apple will be elastic.

Now assume that the price of salt rises. A rise in price of salt will cause a minor or nearly no change in its quantity demanded because we don't have a substitute for salt. Thus, demand curve of salt will be inelastic.

Habits: consumption habits of a person also determines the elasticity of the good consumed by him. The good for which consumer is habitual will be inelastic as compared to the good for which consumer is not habitual.

Suppose X is addicted to smoking. A rise in price of cigarettes occur. This will not have a great impact on quantity demanded of cigarettes by X because X is habitual to it. Thus, here the demand curve for cigarette will be inelastic. If price of hair oil rises X will demand less of it because he's nit habitual to have hair massages. Thus, demand curve fir hair oil will be elastic.

Type of good : elasticity of a good depends upon its type also. A luxurious good will be elastic as compared to necessity goods.

A rise in price of automobile will reduce it's demand as X would not be able to buy it. Thus, the demand curve for automobile being a luxury good is elastic. While on the other hand if the price of a medicine rises( which is a necessity of X as he's a patient) the there will be no change or may be a slight change lower than change in price will occur. This will give an inelastic demand curve for medicine here.

Urgency of consumption: when the consumption of certain good is very urgent then it's demand curve will be inelastic because a change in price will not affect it's consumption as it's urgent. And the good which is not urgent will have an elastic demand curve in comparison to urgent good.

Suppose it's raining heavily and X needs an umbrella. The shopkeeper raises the price of umbrella . Here, X will buy umbrella no matter what the price is as he needs its urgently. Here umbrella will have an inelastic demand curve for X.

Time period: When a consumer has short span of time , the price elasticity of a good us high and when he has long span of time then price elasticity will be low. This happens because consumer get time to think of other choices as per price rise . During short time, he doesn't have time to think of other choices and due to which often slight changes occur while during long time other choices can be worked out changing consumer preferences.

For a demand curve to be price elastic means that the change in quantity demanded for the good is more than the change in price of the commodity.

When the seller raises the price of a good by 10% that is price elastic then the quantity demanded of that good will increase by more than 10% because elastic good means that change in quantity demanded is more than change in price.