Question

Why is elasticity of demand greater for goods that are a large share of a consumer's budget?

Answer 1

The proportion of consumer’s income spent on a particular commodity also influences the elasticity of demand for it. The greater the proportion of income spent on a commodity, the greater will be generally its elasticity of demand, and vice versa.

The demand for common salt, soap, matches and such other goods tends to be highly inelastic because the households spend only a fraction of their income on each of them. When the price of such a commodity rises, it will not make much difference in consumers’ budget and therefore they will continue to buy almost the same quantity of that commodity and, therefore, the demand for them will be inelastic.

On the other hand, demand for cloth in a country like India tends to be elastic since households spend a good part of their income on clothing. If the price of cloth falls, it will mean great saving in the budget of many households and therefore they will tend to increase the quantity demanded of the cloth. On the other hand, if the price of cloth rises many households will not afford to buy as much quantity of cloth as before, and therefore, the quantity demanded of cloth will fall.