Determinants of Price Elasticity  

Now that we have described what elasticity is, let Us look into the reasons for the demand for some goods being elastic and others inelastic. The main factors governing the magnitude of price elasticity are discussed here.

1.      Closeness of Substitutes: The price elasticity for a product is high if it has numerous close substitutes. Increase in the price of the product results in consumers buying close substitutes. Hence the price elasticity of demand for a particular brand of product is higher than the product as a whole. It is for this reason that the demand curve faced by a firm is more-elastic than the one faced by the corresponding industry. For instance, the demand for cold drinks is inelastic but the demand for Coke is elastic. 

2.      Nature of the Good: In general, luxury goods are price elastic and necessities are price inelastic. Demand for PCs is more responsive to change ill price while demand -for wheat has low elasticity, since it is an essential commodity. .But the luxury/necessity dichotomy is ambiguous. This is so because one person's luxury is another person's necessity. For example, demand for premium end automobiles may be elastic, but a high price of Mercedes may not affect demand for consumers who regard it as a necessity. 

3.      Proportion of Income Spent: The greater the Income spent on a good the greater the elasticity of demand, and vice versa. Demand for common salt, matches, and buttons may be highly inelastic because a typical consumer spends a very small fraction of his income on such goods. In contrast, demand for goods like TV and clothing tends to be elastic, as they constitute a major proportion of consumers' budget. 

4.      Time Period: The price elasticity is generally more elastic in the long run than in the short run, It usually takes some time for consumers to learn the availability of substitutes and to adjust their purchases to price change. When the petrol prices increased in 1974, the demand of petrol increased sharply in the period immediately following H. In the long runt the price elasticity became elastic as the consumers replaced their gas-guzzlers with fuel-efficient automobiles, switched to car pools, and to public transport. 

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