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Factors Determining Price Elasticity of Demand

The price elasticity of demand is not the same for all commodities. It may be equal or low depending upon a number of demand, in brief, are as under:


(i)Nature of Commodities. In developing countries of the world, the per ca pita income of the people is generally low. They spend a greater amount of their income on the purchase of necessaries of life such as wheat, milk,course cloth etc. They have to purchase these commodities whatever be their price. The demand for goods of necessities is, Therefore,, less elastic or inelastic. The demand for luxuries goods is greatly elastic.


For example, if the price of burger falls, its demand in the cities will go up.


(ii) Availability of Substitutes. If a good has greater number of close substitutes available in the market, the demand for the good will be greatly elastic.

For example, if the price of Coca- Cola rises in the market, people will with over to the consumption of Pepsi Cola, which is its close substitute. So demand for Coca-Cola is elastic.

(iii) Price discrimination in cases of joint supply:  The concept of elasticity is of great advantage where the separate costs of joint products cannot be measured.

(iv)Importance to businessmen: the concept of elastic is of great importance to businessmen. When the demand of a good is elastic, they increases sale by lowering its price. In case the demand is inelastic, they charge higher price for a commodity.

(v) Help to trade unions: The trade unions can raise the wages of the labor in an industry where the demand of the product is relatively inelastic. On Other hand, if the demand, for product is relatively elastic, the trade unions cannot press for higher wages.

(vi) Usein international trade: The term of trade between two countries are based on the elasticity of demand of the traded goods.

(vii) Determination of rate of foreign exchange: The rate of foreign exchange is also considered on the elasticity of imports and exports of a country.

(viii) Guideline to the producers of advertisement: The concept of elasticity provides a guideline to the amount to be spent on advertisement. If the demand for a commodity is elastic, the producers shall have to spend large sums of money on advertisement for increasing the sales.

(ix) Use in factor pricing: The factors of production which have inelastic demand can obtain a higher price in the market and vice versa.