A change in price does not lead to the same proportionate change in the quantity demanded. Sometimes, even a slight change in price may affect the demand of the commodity to a considerable extent. While it may also happen that even large changes in price are unable to affect demand at all.
Further, different goods respond differently to a change in its price. There are a number of factors which affect the elasticity of demand of a commodity. Some of these are as follows:
(1) Nature of Commodity:
The first and foremost determinant of the elasticity of demand is the nature of the commodity. Necessities (like food grains) and prestige goods have an inelastic demand, while luxuries and comforts have relatively elastic demand. Necessities (essentials of life) are demanded, whatever be their price.
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In the case of luxuries and comforts, the change in price makes the consumer change the quantity demanded relatively more and so it is more elastic. For the poor people, the demand is less elastic as they mostly purchase necessities of life.
For middle and upper class people, the demand is relatively elastic as they purchase a number of commodities. In case of commodities of conspicuous consumption, Veblen effect occurs resulting in low elasticity of demand.
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(2) Number of Substitutes:
Commodities with few and poor substitutes like wheat and salt have low price elasticity of demand. If the commodity has many close substitutes, the demand for such a commodity will be highly elastic.
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The reason is that even a small rise in its price will induce buyers to go in for its substitutes, whose prices have remained the same. On the other hand, a fall in its price will induce people to buy this commodity than its substitutes.
Thus, availability of close substitutes makes people sensitive to the change in the price of the commodity. For example, a rise in the price of Tea City tea encourages buyers to use Brook Bond tea and vice-versa.
That is why, the elasticity of demand for a commodity, say; tea is radically different from that of a particular brand, say, Tea City. This is on account of weak brand loyalty and availability of substitutes.
Demand for a good tends to be perfectly inelastic if no substitutes are available. The demand for salt is almost perfectly inelastic. People buy the same amount of salt, whether it is dear or cheap.
(3) Number of Uses of a Commodity:
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The greater the number of uses to which a commodity can be put, the greater will be its price elasticity of demand. Thus, electricity, which can be used in heating, cooking, lighting and industrial purposes, will have high price elasticity of demand.
When its price increases, it will be put to only most important use (i.e., lighting). On the other hand, when its price falls it will be put to less important uses also like cooking, heating, etc. and consequently its quantity demanded will rise significantly.
Similarly, when the price of milk is very high, it is used only for feeding children and sick persons. At low price, it would be put to other uses also such as preparation of curd, cream, ghee, sweets, etc. A commodity with only one or a few uses (like butter), however, has low elasticity of demand.
Demand for a commodity, which has a number of uses may be elastic in some uses and inelastic in some other uses. For instance, if the price of coal rises, the railways will continue to use it for the generation of steam power and consumers may give it up and shift to alternative domestic fuels (e.g., gas or kerosene oil). Thus, demand for coal is inelastic in one use (for railways) and elastic in the other use (for consumers for domestic use).
(4) Price Level of the Commodity:
The level of price also affects the price elasticity of demand. Goods which are very costly or very cheap have a relatively inelastic demand. This is so, because, high price goods are purchased by the rich people.
A change in price in either direction will not affect the demand of the commodity in an appreciable manner. If, on the other hand, the price of a commodity is very low, all those who want to buy it will do so and will buy the desired quantities as the total expenditure on cheap goods is too low.
Accordingly, change in price will not affect the quantity demanded. However, at middle range of prices, demand tends to be elastic as the rise or fall in price will affect the demand of a large number of persons including middle class people.
(5) Position of Commodity in Consumer’s Budget:
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 generally be its elasticity of demand and vice-versa.
The demand for common salt, soap, matches, ink, etc. tends to be highly inelastic, because the consumers spend a small proportion of their income on each of them.
When the price of such a commodity changes, they will continue to purchase almost the same quantity of that commodity. The demand for cloth, however, tends to be elastic on which a considerable part of their expenditure is spent.
(6) Adjustment Time/Postponement of Demand:
Demand for a commodity tends to be elastic, if the demand for it can be postponed. The reason is that consumers can substitute goods in the long run. The greater the time period, the greater is the price elasticity of demand. In the short run, however, substitution of one commodity by the other is very difficult.
Therefore, the commodity has relatively inelastic demand in the short period. For example, in the rainy season, the demand for umbrella cannot be postponed and accordingly it is inelastic. However, during summer, when the demand for woollen clothes can be postponed, it is rather elastic.
Generally, a consumer can postpone the demand for durable goods and hence its demand is elastic. For example, when the price of car rises, consumer maintains the old car for a longer period.
But, in the long-run, durable goods wear out and need replacement. So, these goods have inelastic demand in the long-run. Further, demand for certain goods like salt, sugar, food grains, etc. cannot be postponed even in the long period. Hence, these are inelastic in demand.
(7) Joint Demand:
When the goods are jointly demanded, the elasticity of demand is usually low. Such goods are also called complementary goods. The elasticity of demand for a commodity depends upon the elasticity of the other jointly demanded commodity, since demand of one good varies along with the demand of the other good.
Generally, the elasticity of the demand is determined by the good, which is more important. For example, the elasticity of demand for petrol depends upon the elasticity of demand for car.
(8) Consumer’s Behaviour:
Consumer’s habits, tastes, preferences, etc. also affect the elasticity of demand. If a consumer is habituated or addicted to use of tobacco, alcohol or drugs, its demand will be inelastic. Further, if a certain type of garment is his vogue and its customers stick to it, a sharp increase in its price will not reduce its demand much.
Hence, demand for that garment would be inelastic. Furthermore, if a product is purchased very frequently by the consumer, it will have a high elasticity. On the other hand, if the consumer purchases it only occasionally or rarely on certain occasions, it with have inelastic demand.
While assessing the elasticity of demand, all the above factors should be taken into account, which reinforce each other in determining its value. These factors may operate against each other. The elasticity of demand is the net result of these factors.