Business Economics Determinants of Price Elasticity of Demand
The Price Elasticity of Demand (PED) refers to the change in demand which arises due to the change in price.
It is the percentage change in quantity demanded in response to a one percent change in price and where all other determinants remain constant.
Elasticity = % Change in Quantity Demanded
% Change in Price
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Determinants of Price Elasticity of Demand
- Availability of Substitute Goods:
The greater the number of substitutes available in the market, the greater the elasticity. When there are several substitutes are available then the consumers can shift from one product to another even if there is a slight change in the price of the product. Whereas, if there are no substitutes available then the demand for a good is more likely to be inelastic.
- Brand Loyalty:
Products which have higher brand loyalty towards the product, then the demand becomes relatively inelastic. The price increase does not affect the demand of the product because of the attractiveness towards the other features of the product which means that the customers stay loyal. Whereas if there is no brand loyalty, the demand remains elastic i.e. the customers shift easily from one product to the another even on a slight change in the price of the product.
- The degree of necessity:
The greater the necessity for a good, the lower the elasticity. Consumers will buy the products of necessity regardless of price For e.g., Medical Insulin. But if the product comes under the luxury products then the demand is generally elastic. However, some products that are habit forming generally becomes from low degree of necessity to high degree of necessity like Cigarettes, Coffee etc.
- Duration of Price Change:
Elasticity tends to remain greater over the long run than the short run products in case of Non-durable goods. In the short run, it is difficult for customers to find the substitutes. However for Durable products, like Cars etc., the demand tends to be elastic even in short run even if there is a slight change in the price of the product.
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- Income level:
People who have a high income are less affected by the price change than the people with low income. A rich man will not curtail the consumption of vegetables even if the prices are slightly higher.
- Percentage of consumer’s income allocated to spending the good:
Goods that take a high proportion of household income will tend to have more elastic demand.
- The Possibility of Postponement of purchase:
If the use or purchase of the commodity can be postponed for some time than the demand remains elastic.
- Joint Demand:
The elasticity of demand for a commodity is also affected by the elasticity of its jointly demanded commodities. For e.g., If the demand of the pen is inelastic then the demand for the ink will also be inelastic.
Learn more topics for CS Foundation classes
CS Foundation Business Economies Forms of Market
Central Problems of an Economy topic of CS Foundation
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