Reviewed by Toluwalase Solanke
Introduction
Elasticity of Demand refers to the degree of responsiveness of the quantity demanded of a commodity to changes in any of its determinants, such as price, income, or the price of related goods. It is broadly divided into three main types: price elasticity of demand (PED), which measures how quantity demanded changes when price changes; income elasticity of demand (YED), which measures how quantity demanded responds to changes in consumers’ income; and cross elasticity of demand (XED), which measures how quantity demanded of one good responds to a change in the price of another good. These concepts are crucial for businesses and governments because they help predict consumer behaviour; for instance, if demand is price inelastic, a price increase will raise total revenue, while if demand is income elastic (luxury goods), sales will rise sharply as income grows. Factors such as availability of substitutes, necessity versus luxury, proportion of income spent, and time period all influence how elastic or inelastic demand will be. Understanding elasticity enables better pricing, taxation, and production decisions in an economy.
General formula: Elasticity=% change in quantity demanded% change in determinant
Factors Affecting Elasticity of Demand
1. Availability of Substitutes
2. Nature of the Commodity (Necessity vs. Luxury)
3. Proportion of Income Spent on the Good
4. Time Period Under Consideration
5. Degree of Habit or Addiction
6. Durability of the Good
7. Range of Uses of the Commodity
8. Number of Income Groups Using the Good
The main factor affecting elasticity of demand is the availability of close substitutes. If a good has close substitutes, its demand tends to be elastic. This is because when the price of the good rises, consumers can easily switch to alternative products. For example, if the price of Coca-Cola increases, consumers can readily buy Pepsi or other soft drinks. A small price rise leads to a large fall in quantity demanded. On the other hand, goods with few or no substitutes, such as salt or life-saving medicines, have inelastic demand because consumers have no alternative but to buy them even at higher prices.
Whether a good is a necessity or a luxury influences its elasticity of demand. Necessities, such as basic food items (rice, bread), water, and electricity for home use, have inelastic demand. Consumers must purchase these goods regardless of price changes because they are essential for survival or daily living. A price increase in rice will not significantly reduce the quantity demanded because people still need to eat. In contrast, luxury goods such as expensive cars, designer clothes, or foreign holidays have elastic demand. When the price of a luxury good rises, consumers can easily postpone or cancel the purchase without affecting their basic well-being, leading to a large fall in quantity demanded.
The percentage of a consumer’s income that is spent on a good affects its elasticity. Goods that take up a large proportion of income, such as housing, a car, or a refrigerator, tend to have elastic demand. When the price of such an expensive item rises, consumers feel the change significantly in their budget and will reduce their purchase considerably. For example, a 10% increase in the price of a house will likely cause many potential buyers to delay purchase. Goods that take up a very small proportion of income, such as a matchbox, a pen, or a packet of salt, have inelastic demand. Even if their price doubles, the actual extra cost is so small that consumers hardly notice and continue buying similar quantities.
The time period allowed for consumers to adjust affects the elasticity of demand. In the short run, demand is generally inelastic. When the price of petrol rises suddenly, a driver cannot immediately change their car or reduce driving habits significantly; they still need to fill the tank to go to work. In the long run, demand becomes more elastic. Over several years, consumers can buy more fuel-efficient cars, use public transport, move closer to work, or switch to electric vehicles. Therefore, the longer the time period, the more opportunities consumers have to find substitutes or adjust their behaviour, making demand more responsive to price changes.
Habitual or addictive goods have inelastic demand. Products like cigarettes, alcohol, or coffee create strong consumer habits. An addicted smoker will continue to buy cigarettes almost regardless of price increases because the psychological or physical need is strong. A daily coffee drinker may not reduce consumption much even if coffee prices rise. The habit overrides the price signal. In contrast, non-habitual goods where consumers have no strong attachment are more elastic. For example, a particular brand of breakfast cereal can easily be switched if its price rises because there is no addiction to that specific brand.
The durability of a product affects how easily a consumer can postpone its replacement. Durable goods, such as cars, washing machines, or furniture, have more elastic demand. If the price of a new refrigerator rises, a consumer can decide to repair their old one and wait another year to buy a new one. This ability to postpone purchase makes demand sensitive to price changes. In contrast, non-durable goods (perishables or single-use items) like fresh milk, bread, or petrol have less elastic demand. You cannot postpone buying dinner tonight or delay filling the car’s tank if it is empty. Once the good is used up, it must be replaced soon, regardless of small price changes.
A good with multiple or alternative uses tends to have elastic demand. For example, electricity is used for lighting, heating, cooking, running machines, and entertainment. If the price of electricity falls, it will be used for many more purposes (e.g., heating swimming pools, charging electric cars). Conversely, if the price rises, consumers will cut off the least important uses first (e.g., decorative garden lights) and keep only essential uses (e.g., cooking). A good with only one or very few uses, such as a specific medicine for a disease, has inelastic demand because there is no alternative use to cut back on when price rises.
Goods consumed by a wide range of income groups tend to have elastic demand. If a product is used mostly by rich consumers, a price increase may not affect them much because it represents a small fraction of their income. However, if a good is essential for lower-income groups (e.g., public transport fare), it may still be inelastic for them. More commonly, goods with broader market appeal see more responsiveness because middle- and lower-income consumers will quickly adjust purchases when prices change, while upper-income consumers might not. Overall, the concentration of buyers in lower-income brackets makes demand more elastic.
Summary
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Elasticity of Demand (General) measures the responsiveness of quantity demanded to a change in a determinant
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Factors Affecting Elasticity of Demand: substitutes, necessity vs luxury, income proportion, time, addiction, durability
Read also: 7 objects to Check Before Deciding on Elasticity of Supply (PES)
