What are the factors that determine the price elasticity of demand for a commodity?

Answer Details

Price elasticity of demand measures how responsive the quantity demanded of a commodity is to a change in its own price, \(E_d = \dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}\). The size of this responsiveness is determined by the following factors:

• Availability of close substitutes: the more numerous and closer the substitutes, the more elastic the demand, because buyers switch easily when price rises.
• Proportion of income spent on the good: goods that take a large share of income tend to have elastic demand; goods on which very little is spent (salt, matches) tend to be inelastic.
• Nature of the commodity: necessities such as food and medicine have inelastic demand, while luxuries have more elastic demand.
• Number of possible uses: a commodity with many alternative uses tends to have more elastic demand.
• Time period: demand is usually more elastic in the long run than in the short run, since consumers need time to adjust habits and find substitutes.
• Habit or addiction: habit-forming goods such as cigarettes have inelastic demand.
• Durability and possibility of postponement: goods whose purchase can be postponed or that can be repaired tend to have more elastic demand.
• Price level of the good: demand for very cheap items is often inelastic, while demand for costly items tends to be more elastic.