There are different determinants of price elasticity of demand. These are discussed below:
1. Substitute Brands:
The number of available substitute brands is the most important factor in determining price elasticity of any product.
More the number of substitutes, higher the elasticity of demand. It is so because should there be an increase in price of the product, existing customers will reduce or abandon its use, since they will have more options before them to choose from.
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However, mere availability of substitutes is not enough to ensure high price elasticity of demand. Steady supply of substitutes in the market is also important in determining price elasticity. In some cases, the substitutes are not readily available. So high lead- time (time a gap between ordering a product and receiving it) of substitutes reduces the value of price elasticity.
Beside the number and availability of substitutes, the closeness of the available substitutes is also very important. For example, butter has two substitutes – cheese and margarine. Of these two, as a substitute, margarine is closer to butter than is cheese. Hence, if we consider cheese as the only substitute for butter, the elasticity will be lower than the case of considering margarine as its substitute.
2. Budget Share:
Demand is relatively inelastic for products where a negligible proportion of income is spent. For the items like salt, rubber bands, etc. small shares of total budget of the consumers are required and people generally do not bother to change the amount of consumption even if the price of these items change.
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This is because the consumption of these products per head per month is usually very small and even after a price hike (of course up to a certain limit), the customers do not reduce its consumption as it hardly changes their purchasing capacity.
Price elasticity of demand for a normal product is summarized in a tabular form below:
| A relationship is defined as | When the value of elasticity is | Which implies that |
| Perfectly elastic | Infinity | Very small increase (decrease) in price causes an infinitely large decrease (increase) in the quantity demanded |
| Elastic | Less than infinity but greater than one | The percentage decrease (increase)in the quantity demanded is greater than the percentage increase (decrease) in price |
| Unit elastic | One | The percentage decrease (increase) in the quantity demanded is equal to the percentage increase (decrease) in price |
| Inelastic | Greater than zero but less than one | The percentage decrease (increase)in the quantity demanded is less than the percentage increase (decrease) in price |
| Perfectly inelastic | Zero | The quantity demanded remains the same at all prices |
3. Nature of Products:
Price elasticity of demand also depends on the nature of the product in consideration. For luxury items (e.g., jewellery), price elasticity is comparatively higher than it is for necessity items, because even if the price changes, the consumer will not be able to reduce the level of consumption of necessity goods, i.e., the value of ∆Q is negligible or zero, whereas the consumption of luxury items can be curtailed if the price of it increases. It is assumed here that income of the consumers and other factors remain the same.
4. Time:
The quantum of time lapse since the price change is another considerable factor. Even if the price of a product changes (specially in case of increase in price), customers may not change their consumption level instantaneously.
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This may be due to the habit of consumers and also, due to non-availability of substitutes. But with the passage of time, as new and cheaper substitutes become available in the market, consumers may change their purchasing behaviour and start buying the cheaper varieties.