Question

Briefly explain the factor(s) that determine the price elasticity of a good

Answer 1

Solution-

Following are the factors that determines the Price elasticity

1. Nature of the Good:

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. The elasticity of demand for a necessary good is relatively small. For example, if the price of such a good rises, its buyers generally are not able to reduce its demand.

But, elasticity of demand for a luxury good is generally high. This is because the consump­tion of a luxury good, unlike that of a necessary commodity, can be deferred. That is why if the price of such a good increases, the demand for the good can be considerably reduced.

2. Availability of Substitute Goods:

If close substitutes for a particular good are available in the market, then the demand for the good would be relatively more elastic. 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.Therefore, demand for coffee would be relatively more elastic because of the availability of tea.

3. Number and Variety of Uses of the Product:

The more the number and variety of uses of a good, the more would be its elasticity of demand. One such good is electricity that is used in a number of ways. For example, use of electricity for the purposes of lighting, heating, cooking, ironing and also use electricity as a source of power in industries.

4. Proportion of Income Spent on the Good:

The price-elasticity of demand for a good also depends on the proportion of their income the buyers spend on the good. If the buyers spend a small proportion of their income, then they would not considerably decrease their purchase of the good as its price increases.

5. Role of Habits:

The habits of people also play an important role in determining the extent of the elasticity of demand for a good. Sometimes some people completely surrender to the consumption of articles of addiction like drugs, alcohol and tobacco products. Consequently, if the prices of these goods increase, demand for them do not decreases considerably and so their elasticity of demand will be relatively small.

6. Possibility of Deferment of Consumption:

if the buyers are able to defer the purchase or consumption of a good, if required, then it would have a relatively high elasticity of demand. For, if its price rises, its purchase would be deferred and its demand would fall, and if its price falls the deferred demand would appear in its market. The examples of such a good are building materials like cement, iron rods, etc.

7. Price of the Good:

The elasticity of demand for a good also depends on its own price. As price changes, quantity demanded of the good changes, owing to the law of 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.