Price Elasticity of Demand & Its Determinants
What is the price elasticity of demand? Explain its determinants.
Price Elasticity of Demand:
The price elasticity of demand is defined as the measure of degree of responsiveness of quantity demanded for a commodity to the change in its price. It is also defined as the ratio of percentage change in quantity demanded for a commodity to the percentage change in its price. It can be expressed in the following way:
- Ep = Coefficient of price elasticity of demand
- Q = Initial quantity demanded
- P = Initial price
Determinants of the Price Elasticity of Demand
The price elasticity of demand for a commodity is determined by a number of factors which are as follows:
- Nature of the commodity: The elasticity of demand for any commodity depends upon the nature of the commodity, i.e. whether it is a necessity, comfort or luxury. The demand for necessities of life is generally less elastic. The demand for comfortable goods like milk fan freeze etc. is neither very elastic nor very inelastic because, with the rise or fall in their prices, the demand for them decreases or increases moderately. On the other hand, the demand for luxury goods is more elastic because with a small change in their prices, there is a large change in their demand.
- Substitute: Commodities having substitutes have more elastic demand because with the change in the price of one commodity, the demand for its substitute is immediately affected. For example, if the price of coffee rises, assuming that the price of tea remains constant. the demand for tea increases and vice versa.
- Goods having several uses: if a commodity has several uses, it has an elastic demand. For example, electricity has multiple uses. It is used for lighting room heating cooking etc if the tariffs on electricity increase its uses will be restricted to important uses. On the other hand, if its tariffs decrease, it will be used for many uses like cooking, room heating, etc. Joint demand: There are certain commodities, which are jointly demanded such
- Joint demand: There are certain commodities, which are jointly demanded such as car and petrol, pen and ink, bread and butter, etc. The elasticity of demand for the second commodity depends upon the elasticity of demand for the major commodity. For example, if the demand for car is less elastic, the demand for petrol will also be less elastic.
- Income of the consumer: The elasticity of demand also depends on income of the consumers. If the income of consumers is high, the elasticity of demand is less elastic. It is because change in the price will not affect the quantity demanded by a greater proportion. But in low income groups, the demand is elastic. It is because a rise or fall in the price of commodities will decrease or increase the demand. But this does not apply in case of necessities.
- Postponement of the consumption: Those commodities whose consumption can be postponed will be elastic. For example, demand for constructing a house can be postponed. As a result, demand for bricks, cement, sand, etc. will be elastic. On the other hand, goods whose demand cannot be postponed, their demand will be inelastic.
- Habits: People who are habituated to the consumption of a particular commodity like coffee, tea, cigarette, etc. of a particular brand, the demand will be inelastic.