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:
- 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.
- 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.
- 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.
March 07, 2019