In regard to price elasticity of demand we have seen the definition, calculation and also the degrees of price elasticity. I understand you might be wondering when so much is said about price elasticity there must be certain factors that affect it. After going through the list of factors you will quickly recollect that this list is somewhat similar to the list of determinants of demand. But the difference is that those factors affected demand and these ones are responsible for affecting price elasticity of demand.
Type of product: The first factor that influences the PEd is the nature or the type of the product. All our economic concepts and discussions begin as well as end with the products or commodities. The nature or the characteristic of the product affects the PEd. Today we are surrounded with innumerable goods and services and this has resulted into grouping of the commodities into essentials, comforts and luxuries. The essential commodities tend to be inelastic in nature simply because those are bare minimum necessities. Comfort goods are those goods which are formed generally by habits. In this case also the PEd is relatively inelastic because consumers are so used to them. But luxurious commodities have elastic demand because as their price rises they can be ignored at least for the time being.
Share in Income: Earnings lead to expenditure. Consumers spend different proportions of their incomes on different products. Suppose we have two products namely A and B and a consumer John. Now John spends 1% of his income on product A and 10% on product B. Here the elasticity for product A will be inelastic in nature because only a tiny proportion of John’s income is spent on A. But the demand for B will be relatively elastic one because it is taking a larger chunk of his income.
Multiple uses of the products: There are certain products that have more than one use. In this case the consumers rank the uses in terms of their importance and reduce the same accordingly when the prices of that product goes up. It means that products with many uses have relatively elastic demand.
Habitual products: When certain products are used due to habits, then the elasticity in such cases tends to be relatively inelastic. People who are habituated to smoking are unlikely to give it up and thus they may have relatively inelastic demand.
Time factor: The requirement of the products may differ in the short run and in the long run. In the short run the demand is inelastic as against elastic in the long run. When the consumers have time to respond then over a period of time they may shift from one product to other. The popularity of diesel cars is the result of the rise in petrol prices and gradual shifting of consumers from petrol to diesel.
Substitutes: Substitutes also impact the elasticity. The more the number of substitutes a particular product has, higher will be its price elasticity. We have seen the examples of substitutes like paneer and tofu, butter and margarine, tea and coffee. The demand for the mentioned products will be relatively elastic in nature. In contrast to this, salt will have completely inelastic demand due to absence of any substitutes.
Complementary products: Complementary goods are those goods which are dependent in nature. Thus the demand for fuel will depend upon the automobiles demand. The demand for batteries of mobile phones will be related to the demand for mobiles and so on.
Urgency and postponement: When the need for any product is urgent, then the demand tends to be inelastic. A good example is that of the life saving medicines. We cannot postpone the purchases of medicines and thus their demand will be inelastic. But for certain classes of goods like gadgets and automobiles we can postpone our buying decisions according to their price swings. Their demand will be elastic in nature.
Income groups: Just as products are divided into different groups, we also have low income groups, middle income groups and high income groups. The products that are demanded by high income groups are inelastic in nature because there is not much botheration about the price changes. But in case of low income groups the products demanded by them has elastic demand because of the non affordability factor.
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Let us take a quick look at the following table which sums up the relation between Price Elasticity of Demand and Total Revenue
Price Elasticity of Demand (PEd)
|
PEd Coefficient
|
Price changes
|
Impact on Total revenue
|
Cause of Impact
|
Unitary Elastic
Demand
|
PEd = 1
|
Increase in price
|
Total revenue is unchanged
|
% change in quantity demanded is same as % change in price
|
Decrease in price
|
Total revenue is unchanged
| |||
Elastic Demand
|
PEd > 1
|
Increase in price
|
Total revenue will fall
|
Here the % change in quantity demanded is more than the % change in price
|
Decrease in price
|
Total revenue will rise
| |||
Inelastic Demand
|
PEd < 1
|
Increase in price
|
Total revenue will rise
|
Here the % change in quantity demanded is less than the % change in price
|
Decrease in price
|
Total revenue will fall
|
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