Factors that influence elasticity of demand. Four Factors that Influence the Price Elasticity of Demand 2019-01-23

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Factors Influencing Elasticity of Demand

factors that influence elasticity of demand

How fast supply changes with price depends on this elasticity. Whether incomes increase or reduce, users continue buying and using the given products. A close substitute for Florida oranges is California oranges. Such as car and petrol, pen and ink, etc. A rise in price of coal or firewood used as fuel will not result in the quantity demanded suddenly falling, even though the substitute like kerosene or gas may be cheap. The ease of substitution, in turn, depends on the time period, availability of the substitutes and the production technology.

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What are the Determinants of Elasticity of Demand?

factors that influence elasticity of demand

Effect Condition on relationship between goods Explanation of effect How it affects cross-price elasticity of demand none A finite income imposes a. On the other hand, the larger the price, the more would be the elasticity of demand. This is because the consumpĀ­tion of a luxury good, unlike that of a necessary commodity, can be deferred. The success of any soft drink manufacturer hinges on that company's capability to anticipate these consumer tendencies and plan accordingly. It is the availability of close substitutes that makes the consumers sensitive to the changes in the price of Coca Cola and this makes the demand for Coca Cola elastic.


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Factors affecting elasticity of demand

factors that influence elasticity of demand

For example with a rise in price of Horlicks, poor people by other milk powder relatively cheaper than Horlicks. However, the higher prices may force consumers to reduce their demand for those soft drinks. So their consumption is less important and can be very well postponed. Thus, the demand for Coca Cola is elastic. For, when the price is very small, a change in price would have no considerable effect on demand. But, however, the demand for the prestige goods is said to be inelastic, because people are ready to buy these commodities at any price, such as antiques, gems, stones, etc. So to keep himself fairly within his means, the consumer will reduce the quantity purchased.

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Factors Influencing Elasticity of Demand

factors that influence elasticity of demand

If its price rises to a very high level, it will be used only for essential purposes such as feeding the children and sick persons. For instance diamonds and articles of jewellery are luxuries used by richer classes. But specific brands of petrol or beef are likely to be more elastic following a price change. Nature of Goods: Refers to one of the most important factors of determining the price elasticity of demand. Therefore, the more necessary a good is to us, the less would be its price-elasticity of demand. When price of such a commodity increases, then it is generally put to only more urgent uses and, as a result, its demand falls.


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Price Elasticity of Demand

factors that influence elasticity of demand

So, elasticity of demand is different for different goods. If the price of an output increases, and producers have time to adjust supply, supply will be more elastic. Again, conversely, if the price of coffee decreases, then people might reduce their consumption of tea and they might considerably increase their use of coffee. For, if its price rises, its purchase would be deferred and its demand would fall, and if its price falls the deferred demand would appear in its market. Distribution of Income: Acts as a crucial factor in influencing the price elasticity of demand. The main reason for change in the elasticity of demand with change in price of some goods is the availability of their competing substitutes. When a farmer does not have the ability to house cattle, there is no way to stock the cows until the price of beef increases again.

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7 Factors that influences the Demand for a Commodity

factors that influence elasticity of demand

Once consumers understand the functioning of such goods, they will certainly have a positive attitude and this improves the likelihood of them buying the good. Income: we distinguish two type of goods if we are talking aboutincome. Recommended Reading Buchholz, Todd G. Proportion of Income Spent on the Good 5. But what if cinnamon is scarce? Again, conversely, if the price of coffee decreases, then people might reduce their consumption of tea and they might considerably increase their use of coffee. Factors Effecting the Elasticity of Demand - 20 Good with close substitutes tend to have elastic demand curves.

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What factors influence a change in demand elasticity?

factors that influence elasticity of demand

Proportion of income spent: Elasticity of demand also depends on the proportion of income spent on different goods. If the price of that commodity is increased, the commodity will be demanded only in essential uses, and in other uses, substitute materials will be utilized. For example, if the price of petrol rises, then its demand would not contract immediately until the price of car increases. In the case of necessities, the demand cannot be postponed and so demand becomes inelastic. The price of the product changes - If the price of a product increases, employers are prepared to hire more workers.


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7 Factors that influences the Demand for a Commodity

factors that influence elasticity of demand

The consumer will find it very difficult to make adjustments with substitute commodities. Either way the answer to your question is in your text for that weeks assignment. If it has a lot of substitutes food is this way , then it will be very price elastic. Such as the demand for the furniture can be postponed until the time its prices fall. The greater the possibility of substitution, the greater the price elasticity of demand for it. Alternative use: The demand for those goods having more than one use is said to be elastic.

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