What are the Factors Affecting the Price Elasticity of Demand?
Price elasticity of demand refers to the responsiveness of quantity demanded due to change in its price. So, in short, price elasticity of demand shows, how demand gets affected due to a change in price. Let’s discuss some of the factors affecting the price elasticity of demand.
Factors Affecting Price Elasticity of Demand
Availability of Close Substitute
- Substitute goods are the ones that can replace each other. So, if close substitutes of a commodity are available, its demand will be highly elastic. For example, demand for tea, coffee, etc.
- The availability of close substitutes causes highly elastic demand which means, people have lots of options or they are very flexible in choosing other options.
- If there is an absence of close substitutes, the demand for the commodity is likely to be inelastic. For example, demand for salt, medicine, etc.
- The absence of close substitutes leads to inelastic demand because people don’t have many options. They can’t replace necessities.
- The demand for a commodity to which a person is habitual will be inelastic. For example, if a person is habitual of smoking, he will not give up smoking, and its demand will be inelastic.
- So, if habits are strong, demand will be inelastic.
- The demand for a commodity for which a person can change his habits will be elastic. For example, fast food.
- So, if people are willing to change their habits, the demand will be elastic, and people will have more options.
Different Uses of the Commodity
- If the commodity has many uses, its demand is likely to be elastic. For example, electricity.
- More uses mean more options, so more elastic demand.
- If the commodity does not have many uses, its demand will be inelastic. For example, salt, medicine, etc.
- Less uses, fewer options, inelastic will be demand.
Nature of that commodity
- The demand for necessities is inelastic. For example, food, salt, medicine, etc.
- The demand for luxuries is elastic. For example, cars, jewelry, etc.
- The demand for comforts like fans, cooler, air conditioners, etc. is moderately elastic.
- Longer the time, more elastic demand. For example, demand for TV, etc.
- Shorter the time, inelastic will be demand. For example, medical emergencies, etc.
Tip to remember the factors affecting price elasticity of demand, use the acronym C-HUNT where,
C- Close substitute
U- Uses of the commodity
N- Nature of the commodity
Elastic means more options, like an elastic band, more flexibility.
Inelastic means not much options, you have to buy the good.
Moderately elastic means, some options are available.
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