Question

Explain two of your consumption experiences that illustrate the concepts of price elasticity of demands and income elasticity. In addition, discuss the mechanism of how the factors that affect the elasticity worked.

Answer 1

ANS. The above both the diagram example shows the concept of price elasticity of demand and the income elasticity of demand (other things remain constant).

FACTORS THAT AFFECT THE ELASTICITY OF DEMAND

1. Availability of Substitute : - Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices will induce the buyers to go for its substitutes. For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.

2. Diversity of Uses :- If the commodity under consideration has several uses, then its demand will be elastic. When price of such a commodity increases, then it is generally put to only more urgent uses and, as a result, its demand falls. When the prices fall, then it is used for satisfying even less urgent needs and demand rises.

For example, electricity is a multiple-use commodity.

3. Income level of the buyer:- Elasticity of demand for a good also depends on the income level of the buyer. If the buyer of a good are high end consumer they will not boyhered by a rise in its price or vice versa.

4. Price level :- Elasticity of demand also depends on the level of price of the concerned commodity. Elasticity of demand will be high at high level of price and low at low level of price of commodities.

5. Habit of Consumers :- Commodities, which have become habitual necessities for the consumers, have less elastic demand. It happens because such a commodity becomes a necessity for the consumer and he continues to purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples of habit forming commodities.

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