Determinants of Price Elasticity of Demand

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price.

The determinants of price elasticity of demand are as follow:

1. Substitutability

  • More the substitutes more are the elastic demand.
  • Homogeneous product creates more elastic demand.

2. Proportion of Income

  • Price relative to income.
  • The higher the cost of products the higher is the relative income.

3. Luxuries Versus Necessities

  • Luxuries are more elastic.
  • Luxurious goods create more elastic demand.

4. Time

  • More elastic in long run.
  • Demand is more elastic when people have more time available to adjust to change in price.

Application of Elasticity

  • Large crop yields (Inelastic demand)
  • Excise Taxes (Inelastic demand)

Price Elasticity of Supply

Responsiveness to price changes by producers.

Es= Percentage change in quantity supplied of product X/ Percentage change in price of Product X.

Market Period

  • Can’t immediately respond to the change in prices of some product for example Prices of oranges when out of season.
  • Perfectly inelastic supply.
  • Producer has no time for respond.
  • There is no change in supply with change in demand.

business economics

March 07, 2019