Factors Affecting Price Elasticity of Demand/Determinants of Price Elasticity of Demand with Suitable Examples

Price elasticity of demand varies from goods to goods, time to time, and place to place. There are different responsible factors for the variation in the elasticity of demand. These responsible factors are called factors affecting elasticity of demand or determinants of elasticity of demand. The factors which determine the price elasticity of demand for a commodity or service are briefly explained below. 

1. Availability of Close Substitute

A good having close substitutes will have an elastic demand and a good with no close substitutes will have an inelastic demand. For example commodities such as pens, cold drinks, cars, etc. have close substitutes. When the price of these goods rises, the price of their substitutes remaining constant, there is a proportionately greater fall in the quantity demanded of these goods. That is, their demand is elastic. Commodities such as prescribed medicines and salt have no close substitutes and hence, have an inelastic demand.

2. Income of the Consumers

If the income level of consumers is high, the elasticity of demand is less. It is because a change in the price will not affect the quantity demanded by a greater proportion. But in low-income groups, the elasticity of demand is high.

3. Luxuries versus Necessities

The price elasticity of demand is likely to be low for necessities and high for luxuries. A necessity is a good or service that the consumer must have such as food (bread, milk) and medicines. Luxuries are goods that are enjoyable but not essential. Example: eating in a 5-Star hotel. If the price of necessities rises, then demand will not fall by a greater proportion because their purchase cannot be delayed. That is why the price elasticity of demand in case of necessity is low.

4. Proportion of Total Expenditure Spent on the Product

The higher the cost of the goods relative to the total income of the consumer, the more will be the price elasticity of demand. If the price of bread, ink, salt, matchbox, etc., which is relatively low, doubles it would have almost no effect on the quantity demanded of them. On the other hand, if the price of car doubles then the quantity demanded will fall by a greater proportion showing high price elasticity of demand.

5. Number of Uses of the Commodity

The more the number of uses a commodity can be put to, the more elastic is the demand. If a commodity has few uses, it has an inelastic demand. For example goods like milk, eggs and electricity can be put to many different uses and hence, enjoy elastic demand, i.e., when prices are low, demand increases by a greater proportion as the goods can now be put to less important uses also.

6. Time Period

If the time period needed to find substitutes for the commodity is more, the price elasticity of demand is less and vice versa. For example, flying by airplane has inelastic demand as no substitutes are available in the short run.

Before deciding whether the demand for a commodity is elastic or inelastic, all the factors mentioned above must be simultaneously considered. A summary of the factors affecting the elasticity of demand is given in the following table. 

Factors	The elasticity of demand is more when...
1.Availability of substitutes.	1. More substitutes are available.
2.The income of the consumers.	2. The income of the consumer is less.
3.Luxuries versus necessities.	3. High priced luxuries are available.
4.The proportion of total expenditure spent on the product.	4. The proportion of total expenditure spent is more.
5.The number of uses of the purchased commodity.	5. The number of uses of the good is more.
6. Time period.	6. The time required to find substitutes is less.

Some Suitable Examples of Elastic and Inelastic Demand

Inelastic Demand	Elastic Demand
Gasoline The demand for gasoline generally is inelastic, especially in the short run. Car travel requires gasoline. The substitutes for car travel offer less convenience and control. Much car travel is necessary for people to move between activities and cannot be reduced to save money. In the long run, though, more options are available, such as purchasing a more fuel-efficient car or choosing a job that is closer to where you work.	Gas from a Station The demand for gasoline from any single gas station, or chain of gas stations, is highly elastic. Buyers can choose between comparable products based on price. There are often many stations in a small geographic area that are equally convenient.
Traditional Textbooks Generally, an instructor assigns a textbook to the student, and the student who wants access to the learning materials must buy it, regardless of the price level. Because the student can’t easily identify another textbook or resource that will ensure the same content and grade for the class, he has no substitutes and must buy the book at any price (or opt not to buy it at all).	New Textbook Distribution Channels Increasingly, students have new options to buy the same textbooks from different distribution channels at different price points. The introduction of new distribution channels is increasing options for buyers and having an impact on the price elasticity for publishers.
Specialty Coffee Drinks Many coffee shops have developed branded drinks and specialized experiences to reduce substitutes and build customer loyalty. While black coffee is available almost universally, there are few substitutes for a Starbucks Java Chip Frappuccino. The demand for such products is more inelastic.	Black Coffee Coffee is generally widely available at a level of quality that meets the needs of most buyers. The combination of a low price, relative to the buyer’s spending power, and the fact that the product is sold by many different suppliers in a competitive market, make the demand highly elastic.
Concert Tickets Only Taylor Swift can offer a Taylor Swift concert. She holds a monopoly on the creation and delivery of that experience. There is no substitute, and loyal fans are willing to pay for the experience. Because it is a scarce resource and the delivery is tightly controlled by a single provider, access to concerts has an inelastic demand.	Airline Tickets Airline tickets are sold in a fiercely competitive market. Buyers can easily compare prices, and buyers experience the services provided by competitors as being very similar. Buyers can often choose not to travel if the cost is too high or substitute for travel by car or train.
Medical Procedures Essential medical procedures have inelastic demand. The patient will pay what she can or what she must. In general, products that significantly affect health and well-being have inelastic demand.	Soft Drinks Soft drinks and many other nonessential items have highly elastic demand. There is competition among every brand and type of soda, and there are many substitutes for the entire category of soft drinks.

Credit: lumen learning