Question

Working with your group, identify and discuss factors that make demand curves more/less elastic.

Answer 1

Factors that make demand curves more/less elastic are:

a) Nature of commodity: Demand curve of a commodity is influenced by its nature. There are various types of commodity, such as necessity, comfort and luxury.

Demand for a necessity good is generally inelastic as it is the most essential good for human survival and therefore its demand does not fluctuate much with a variation in price.

Demand for comfort goods like fan, refrigerator, etc., is elastic in nature as consumer can hold its consumption till they get a better price.

The demand for a luxurious commodity is more elastic as compared to demand for comforts.

b) Existence of substitutes: Demand for a commodity will be more elastic if it has large number of substitutes because even a small rise in its prices will encourage the buyers to go for its substitutes. For exa, a rise in the price of coffee encourages buyers to buy tea and vice-versa. Whereas, commodities with few or no substitutes like salt and rice have less price elasticity of demand.

c) Income Level: For higher income groups, elasticity of demand for any commodity is generally less as compared to low income groups. This is so because rich people do not react much by changes in the price of goods. But, poor people are severely affected by rise or fall in the price of goods. Therefore, demand for lower income group is highly elastic.

d) Level of Price: Elasticity of demand is affected by the level of price. Generally, expensive goods have highly elastic demand as their demand vary as per the changes in price. However, demand for inexpensive goods is inelastic as change in prices of these goods do not have any impact on their demand.

e) Habits: Commodities which become the habitual necessities for the consumers, are less elastic. It is so because the consumers are habituated to a particular commodity that when price rises it doesn't have any impact on them, they continue to buy it. Alcohol, cigars are some of the examples of this category.