determinants of price elasticity of demand

At a very high or very low range of prices, demand tends to be inelastic Demand for high priced commodities come from only the rich people who give little importance to price. For example, consumers spend a high amount of their percentage on a car and therefore cars have price elastic demand. If no substitutes are available, demand for goods tends to be inelastic. Commodities are classified as necessities, luxuries and comforts. Number of uses of a commodity:. The demand in each single use of such commodities may be inelastic, but the demand in all uses taken together is elastic. If a good is a necessity, then its demand tends to be inelastic. People with high incomes are less affected by price changes than people with low incomes. A commodity has a high price elasticity of demand (or elastic demand) if it can be put into so many uses. b) The proportion of income spent on the commodity: Change in Quantity Demanded and Change in Demand, Measurement of Price Elasticity of Demand, Interpretation of the Income Elasticity Coefficient (E, Measurement of Income Elasticity of Demand, Measurement of Cross-Price Elasticity of Demand, Application of Price Elasticity of Demand. (i) A necessity that has no close substitute (salt, newspaper, polish etc.) Therefore, the demand for such commodities is elastic. The PED for a given good is determined by one or a combination of the following factors: Availability of substitute goods: The more possible substitutes there are for a given good or service, the greater the elasticity. Price Elasticity of Demand. Determinants/Factors of Price Elasticity of Supply: The main determinants/factors which determine the degree of price elasticity of supply are as under: (i) Time period. The higher the percentage of a consumer’s income used to pay for the product, the higher the elasticity tends to be. There are different determinants of price elasticity of demand. A rich man will not curtail his consumption of vegetables, milk, fruits even if their prices rise significantly and he will continue to purchase the same amount as before. With some commodities, just one is required at a time and it is used for a long time before it gets spoilt. Moreover, consumers purchase almost a fixed amount of a necessity per unit °f time whether the price” is somewhat higher or lower. Determinants of price elasticity of demand . Time element – In the short run the elasticity of demand will be less and in long run it will be more. Some goods have more elastic demand while others have less elastic. What are Chain Elongation and Chain Termination? For instance, once the habit of smoking cigarettes is formed, it is difficult to break away even when the price of cigarettes rises. \(\overset{\underset{\mathrm{def}}{}}{=} \), Determinants of Price Elasticity of Demand. The two factors considered by economists are the availability of substitutes and time. There are generally, five major determinates for price elasticity of demand, they are; the availability of close substitutes, passage of time, whether the good is a luxury or a necessity, definition of the market and how much of the good takes up a consumer’s budget (Elasticity 191). This is because consumers need a longer time to adjust to changes in price. The following are the main factors which determine the price elasticity of demand for a commodity: 1. Before publishing your Essay on this site, please read the following pages: 1. Price elasticity of demand: Price elasticity of demand describes a standard measure of the change detected in the quantity of a demanded or purchased commodity when its price changes. If the income of consumers is high, the elasticity of demand is less elastic. – Explained! Finally, demand is said to be unit elastic if the price elasticity equals 1. The more substitutes a good has and the more close the substitutes are, the... b) The proportion of income spent on the commodity:. However, necessities are difficult to dispense with; therefore, they tend to have inelastic demand. The price elasticity of demand varies widely across different goods. The reason is that in the long-run consumer can change their habits and consumption pattern. Level of Price – At higher levels of prices the demand is more elastic and at lower levels it is less elastic. Thus, the demand for sugar may be fairly elastic. It is always recommended to visit an institution's official website for more information. Time is the most significant factor which affects the elasticity of supply. But a poor man cannot do so. On the other hand clothes and durable items take away a large portion of the income. will have an inelastic demand because its consumptions cannot be postponed. Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand: The availability of close substitutes Whether the good is a necessity or a luxury How broadly you define the market The time horizon being considered A good with many close substitutes is likely to have relatively demand, since consumers can easily choose to purchase one of the close substitutes if the … Essay on Leadership: Introduction, Functions, Types, Features and Importance. The importance of the product’s cost in one’s budget. Some commodities are habit-forming while others are not. Our mission is to provide an online platform to help students to discuss anything and everything about Essay. The following are the important factors that determine the price elasticity: 1. Luxuries are things we can do away with; hence, they tend to have elastic demand. Your browser seems to have Javascript disabled. For example, if a 1% drop in price causes a 1% increase in quantity demanded, elasticity is exactly 1, or unity. For instance, a commodity such as sugar is used for direct consumption, baking bread and cake, making jam, etc. Range of substitutes:. Therefore, price elasticity of building materials will be high. Please see the details of the license for terms of reuse. Published by Experts. Necessities. It tends to have an inelastic demand. If its price rises, it will not be used in less important uses and the quantity demanded will fall appreciably. This table lists the price elasticities for a variety of products. On the other hand, if the price is high and the proportion of income spent on it is large, then it tends to have an elastic demand. Constant unit elasticity. It is because change in the price will not affect the quantity demanded by a greater proportion. Elasticity of demand measures the responsiveness of demand to a change in price. The price elasticity of demand for this price change is –3; Inelastic demand (Ped <1) The Availability of Substitutes 2. The elasticity of demand also depends on income of the consumer. A small rise in the price... 3. sets, decoration items, etc.) Even when the price of such a commodity falls, it is new consumers who will mostly buy them. Thus, the distribution of national income has an important bearing on the elasticity of demand. For example, salt has a relatively low price in Ghana and families spend an insignificant percentage of their income of salt. Practice: Price Elasticity of Demand and its Determinants . 4 Most Important Assumptions of Existentialism. If there is a greater availability of substitutes for a product, then that product is likely to be more... 2. For example, gram is used for money purposes. In the case of substitutes like electricity and gas cookers, if the price of electricity goes up, it will take time for consumers to switch over from electric cookers to gas cookers because consumers need time to acquire the gadgets. Price elasticity of demand (PED) refers to the degree of responsiveness of quantity demanded with respect to change in the price of that particular commodity, other things remain constant. Content Guidelines 2. The demand for a product can be elastic or inelastic, depending on the rate of change in the demand with respect to the change in the price. Determinants of Price Elasticity of Demand a) The number of close substitute goods:. If the price of a good is relatively low such that the expenditure on it is an insignificant fraction of most individual or family incomes, then consumers of such a commodity are insensitive to a price change of the good. Useful Notes on Section 26 of the Indian Penal Code – Reason to believe. Demand for durable goods is more elastic than perishable goods (non-durable) because when the price of former increases, people either get the old one repaired or buy a second hand. Examples of such goods are cars, televisions, furniture, buildings, clothes, etc. (ii) Demand of luxuries is relatively more elastic because consumption of luxuries (TV. Unless specified, this website is not in any way affiliated with any of the institutions featured. 12 Importance of Price Elasticity of Demand – Explained! They tend to have a low elasticity of demand (inelastic demand) because when the price of durable commodity changes, consumers will continue to use what they have. The availability of close substitutes. But in low income groups, the elasticity of demand is elastic. Determinants of Price Elasticity of Demand 1. It is the percentage change in quantity demanded in response to a one percent change in price and where all other determinants remain constant. If Ped > 1, then demand responds more than proportionately to a change in price i.e. can be dispensed with or postponed when their prices rise. What is the Difference between "Tax" and "Fine"? For example if a 10% increase in the price of a good leads to a 30% drop in demand. This is the currently selected item. Perfect inelasticity and perfect elasticity of demand. Therefore, the demand for Klin is likely said to be more elastic because the slightest increase in the price of Klin would cause consumers of the product to switch to one of the substitutes. Moreover, consumers purchase... 2. It is essential for organisations to understand the relationship between the demand and its each determinant to analyse and estimate the individual and market demand for a commodity or service. Privacy Policy3. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. A commodity has elastic demand if there are close substitutes of it. If a product has many close substitutes, for example, fast food, then people... 2. By using these determinants, businesses can estimate how a change in the price affects demand. Disclaimer Copyright. Availability of Substitutes: If a commodity has close substitutes, then the demand for the commodity will be quite... 2. For habit forming commodities, they tend to have less elastic or inelastic demand because once the habit is formed; it is a bit difficult to break away from it even when the price of the commodity increases significantly. Commodities arc also classified as durable and perishable. Non-habit forming commodities tend to have more elastic demand. On the other hand low priced commodities are either necessities or a small part of income is spent an them. Welcome to Shareyouressays.com! Therefore, their demand is inelastic. A commodity has elastic demand if there are close substitutes of it. Determinants Of Price Elasticity of Demand The exact value of price elasticity for a commodity is determined by a wide variety of factors. Determinants of elasticity example . If the percentage is very less then the demand will be inelastic. The demand for such goods is inelastic on which a small portion of income is spent, the j items like toothpaste, shoe polish, electric bulbs have inelastic demand as we spend a small portion of our income on these items. Formula to calculate Price Elasticity of Demand: It can be calculated as the percentage change in quantity demanded divided by the percentage change in price. These are discussed below: 1. In the short-run the demand is inelastic while in the long-run demand is elastic. Price elasticity of demand: measures the responsiveness of quantity demanded to a change in price, along a given demand curve. The Price Elasticity of Demand: One of the main determinants of the Price Elasticity of Demand of a product is the number of substitutes it has. If the use or purchase of a commodity can be postponed for some times, then the demand of such commodity will be elastic. For example, if cement, bricks, wood and other building materials become costlier, people will postpone the construction of houses. DETERMINANTS OF PRICE ELASTICITY OF DEMAND Percentage of income spent: The elasticity of demand is also influenced by the percentage of income spent on the purchase of a commodity. demand is elastic. More the number of substitutes, higher the elasticity of demand. Note that the video(s) in this lesson are provided under a Standard YouTube License. It means people are unresponsive to changes in price. Price elastic demand (less than infinity). On the other hand, if the good does not have any close substitutes, the demand tends to be less elastic or inelastic. Organizing and providing relevant educational content, resources and information for students. The Proportion of Consumer’s Income Spent 3. For example, if the price for drinking... 3. The better the substitutes for a product, the higher the price elasticity of demand. Therefore, even if the price of salt doubles, people find little difficulty in buying the same quantity they used to buy. Price elasticity of demand has four determinants: product necessity, how many substitutes for the product there are, how large a percentage of income the product costs, and how frequently its purchased, according to Economics Help. For instance, we spend a very less amount of our total money income on things like agarbatties (incense sticks), matches, pens, pencils etc. A lower price will attract the buyers’ of the other substitutes to purchase the commodity. A change in the price of high-priced commodities will not generally affect the demand of rich consumers. Complementarity of goods – In case of such goods the elasticity can be elastic or inelastic. Save my name, email, and website in this browser for the next time I comment. Larger the number of uses of a commodity, the higher is its elasticity of demand. Companies often collect this data on the consumer response to price changes. Price elasticity of demand and its determinants. We're sorry, but in order to log in and use all the features of this website, you will need to enable JavaScript in your browser. Generally, the elasticity of jointly demanded goods is inelastic. This article is licensed under a CC BY-NC-SA 4.0 license. Demand for salt is highly inelastic because it has no substitute. Elasticity of demand for a commodity is also influenced by the elasticity of its jointly demanded commodities. Readers Question: What are the major 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. Publish your original essays now. Price Elasticity of Demand T's Jean Shop sells designer jeans. Don't want to keep filling in name and email whenever you want to comment? The demand for the Capri jeans has been very high with teenagers and young women. Total revenue and elasticity. The latest trend setter has been Capri cuffed blue jeans. For example, the detergent, Klin, has a number of close substitutes such as Ariel, Omo, MyMy, etc. Mathematically the value is negative, but we treat it as positive. Register or login to make commenting easier. Determinants of Elasticity of Demand A good with more close substitutes will likely have a higher elasticity. The major factors that determine the price elasticity of demand are: The more substitutes a good has and the more close the substitutes are, the more elastic the demand for the good is. Followings are the main determinants of elasticity of demand: Commodities are classified as necessities, luxuries and comforts. If the price of a good is relatively low such that the expenditure... c) Time:. World’s Largest Collection of Essays! If the demand for pen is inelastic then the demand for ink will be inelastic. Nature of commodity:. Economics » Theory of Demand » Elasticity of Demand. Determinants of Elasticity of Demand Definition: The Elasticity of Demand is a measure of sensitiveness of demand to the change in the price of the commodity. Inelastic demand means a change in price causes a smaller % change in demand. Determinants 1. A small rise in the price of a commodity having close substitute will force the buyers to reduce the consumption of the commodity in favour of substitutes. Price Elasticity of Demand Price Elasticity of Demand (PED) is defined as the responsiveness of quantity demanded to a change in price. (iii) Comforts have more elastic demand than necessities and less elastic in comparison to luxuries. Determinants of Elasticity of Demand Apart from the price, there are several other factors that influence the elasticity of demand. All names, acronyms, logos and trademarks displayed on this website are those of their respective owners. Share Your Essays.com is the home of thousands of essays published by experts like you! Time. If the prices of these items rise, the consumer budget is not affected much. The following factors determine what the value of the price elasticity of demand is for a good: The amount of income spent on the good – If a large proportion of income is spent on the good, the demand is usually price elastic. The price elasticity of demand (PED) is a measure of how much the quantity demanded changes with a change in price. The business has increased its supply of Capri jeans due to the high demand.The owner, Terri Johnson, contemplates increasing the price from $9.00 to $10.00. Register or login to receive notifications when there's a reply to your comment or update on this information. Substitutes. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand … For example, there is hardly a substitute for food as a whole; hence, the demand for food as a whole is inelastic. Substitute Brands: The number of available substitute brands is the most important factor in determining price elasticity of any product. Determinants of demand are the factors that influence the decision of consumers to purchase a product or service. Contrary to this, the bangles for women have no other use and, therefore, their demand is relatively inelastic. With such a commodity, if the price changes, the response of quantity demanded to the price change becomes significant when changes in quantity demanded of each use are put together. For non-durable goods, the longer a price change holds, the higher the elasticity is … There are several factors that affect how elastic (or inelastic) the price elasticity of demand is, such as the availability of substitutes, the timeframe, the share of income, whether a good is a luxury vs. a necessity, and how narrowly the market is defined. This is a lesson from the tutorial, Theory of Demand and you are encouraged to log in or register, so that you can track your progress. 1] Price Elasticity of Demand This refers to the change or sensitivity in the customer’s demand for the quantity of a good with respect to a change in its price. The three determinants of price elasticity of demand are: 1. TOS4. The demand for a product tends to be more elastic in a longer period of time and less elastic in a shorter period of time. The price elasticity of demand (PED) is a measure that captures the responsiveness of a good’s quantity demanded to a change in its price.

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