Determinants of Price Elasticity of Demand

Determinants of Price Elasticity of Demand

The price elasticity of demand varies widely across different goods. Some goods have more elastic demand while others have less elastic. The major factors that determine the price elasticity of demand are:

a) The number of close substitute goods:

The more substitutes a good has and the more close the substitutes are, the more elastic the demand for the good is. For example, the detergent, Klin, has a number of close substitutes such as Ariel, Omo, MyMy, etc. Therefore, the demand for Klin is likely said to be more elastic because the slightest increase in the price of Klin would cause consumers of the product to switch to one of the substitutes.

On the other hand, if the good does not have any close substitutes, the demand tends to be less elastic or inelastic. For example, there is hardly a substitute for food as a whole; hence, the demand for food as a whole is inelastic.

b) The proportion of income spent on the commodity:

If the price of a good is relatively low such that the expenditure on it is an insignificant fraction of most individual or family incomes, then consumers of such a commodity are insensitive to a price change of the good. It tends to have an inelastic demand.

On the other hand, if the price is high and the proportion of income spent on it is large, then it tends to have an elastic demand. For example, salt has a relatively low price in Ghana and families spend an insignificant percentage of their income of salt. Therefore, even if the price of salt doubles, people find little difficulty in buying the same quantity they used to buy.

c) Time:

The demand for a product tends to be more elastic in a longer period of time and less elastic in a shorter period of time. This is because consumers need a longer time to adjust to changes in price. In the case of substitutes like electricity and gas cookers, if the price of electricity goes up, it will take time for consumers to switch over from electric cookers to gas cookers because consumers need time to acquire the gadgets.

d) The number of possible uses:

A commodity has a high price elasticity of demand (or elastic demand) if it can be put into so many uses. With such a commodity, if the price changes, the response of quantity demanded to the price change becomes significant when changes in quantity demanded of each use are put together. For instance, a commodity such as sugar is used for direct consumption, baking bread and cake, making jam, etc. Thus, the demand for sugar may be fairly elastic.

e) Habit-forming commodities:

Some commodities are habit-forming while others are not. For habit forming commodities, they tend to have less elastic or inelastic demand because once the habit is formed; it is a bit difficult to break away from it even when the price of the commodity increases significantly. For instance, once the habit of smoking cigarettes is formed, it is difficult to break away even when the price of cigarettes rises. Non-habit forming commodities tend to have more elastic demand.

f) Luxuries and necessities:

Luxuries are things we can do away with; hence, they tend to have elastic demand. However, necessities are difficult to dispense with; therefore, they tend to have inelastic demand.

g) The durability of the commodity:

With some commodities, just one is required at a time and it is used for a long time before it gets spoilt. Examples of such goods are cars, televisions, furniture, buildings, clothes, etc. They tend to have a low elasticity of demand (inelastic demand) because when the price of durable commodity changes, consumers will continue to use what they have. Even when the price of such a commodity falls, it is new consumers who will mostly buy them.