Question

Describe the factors that determine own price elasticity of demand.

Answer 1

• The price elasticity of demand refers to the responsiveness of a goods demand to a change in its price.
• There are various factors that determine the price elasticity of demand. Some of them are :-

1. Nature of the goods :- price elasticity of demand depends on whether the good is a necessity or a luxury. A necessity good is said to have an inelastic demand as its demand does not change even when its price change, for example : electricity. Luxury goods are said to have an elastic demand as their demand increases or decreases with a decrease or increase in its price. For example :- luxury car's.
2. Availability of substitutes :- when the consumer's face rising prices their demand for that good decreases and they search for its substitutea that have relatively less cost.
3. Price of a good :- A good with a smaller price is said to have inelastic demand than with a good having a higher price.
4. Distribution of income :- When people have high income, their demand for any good is said to be inelastic and people with lower incomes have an elastic demand for goods they purchase as they respond quickly to the price changes.
5. Time period :- The longer the time consumer's get to choose between any two similar goods, higher is the price elasticity of demand and vive versa because when the consumer's get longer time, they adjust easily with the new prices and can take wise decisions.