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MB0042 Q.1 Price elasticity of demand depends on various factors. Explain each factor with the help of an example.

Answer:
The Price elasticity of demand depends on various factors are:

1. Nature of the Commodity
Commodities coming under the category of necessaries and essentials tend to be inelastic because people buy them whatever may be the price.

For example, rice, wheat, sugar, milk, vegetables etc. on the other hand, for comforts and luxuries, demand
tends to be elastic e.g., TV sets, refrigerators etc.

2. Existence of Substitutes: Substitute goods are those that are considered to be economically interchangeable by buyers. If a commodity has no substitutes in the market, demand tends to be inelastic because people have to pay higher price for such articles.

For example: Salt, onions, garlic, ginger etc. In case of commodities having different substitutes, demand tends to be elastic.

For example, blades, tooth pastes, soaps etc.

3. Number of uses for the commodity: Single-use goods are those items which can be used for only one purpose and multiple-use goods can be used for a variety of purposes.
If a commodity has only one use (singe use product) then demand tends to be inelastic because people have to pay more prices if they have to use that product for only one use.

For example: all kinds of eatables, seeds, fertilizers, pesticides etc. On the contrary, commodities having several uses, [multiple-use-products] demand tends to be elastic. For example, coal, electricity, steel etc.

4. Durability and reparability of a commodity: Durable goods are those which can be used for a long period of time. Demand tends to be elastic in case of durable and repairable goods because people do not buy them frequently. For example, table, chair, vessels etc. On the other hand, for perishable and non-repairable goods, demand tends to be inelastic e.g., milk, vegetables, electronic watches etc.

5. Possibility of postponing the use of a commodity:
In case there is no possibility to postpone the use of a commodity to future, the demand tends to be inelastic because people have to buy them irrespective of their prices.

For example: medicines. If there is possibility to postpone the use of a commodity, demand tends to be elastic

e.g., buying a TV set, motor cycle, washing machine or a car etc.

6. Level of Income of the people
Generally speaking, demand will be relatively inelastic in case of rich people because any change in market price will not alter and affect their purchase plans. On the contrary, demand tends to be elastic in case of poor.

7. Range of Prices
There are certain goods or products like imported cars, computers, refrigerators, TV etc, which are costly in nature. Similarly, a few other goods like nails; needles etc. are low priced goods. In all these cases, a small fall or rise in prices will have insignificant effect on their demand. Hence, demand for them is inelastic in nature. However, commodities having normal prices are elastic in nature.

8. Proportion of the expenditure on a commodity
When the amount of money spent on buying a product is either too small or too big, in that case demand tends to be inelastic. For example, salt, newspaper or a site or house. On the other hand, the amount of money spent is moderate; demand in that case tends to be elastic. For example, vegetables and fruits, cloths, provision items etc.

9. Habits
When people are habituated for the use of a commodity, they do not care for price changes over a certain range.
For example: in case of smoking, drinking, use of tobacco etc. In that case, demand tends to be inelastic. If people are not habituated for the use of any products, then demand generally tends to be elastic.

10. Period of time
Price elasticity of demand varies with the length of the time period. Generally speaking, in the short period, demand is inelastic because consumption habits of the people, customs and traditions etc. do not change. On the contrary, demand tends to be elastic in the long period where there is possibility of all kinds of changes.

11. Level of Knowledge
Demand in case of enlightened customer would be elastic and in case of ignorant customers, it would be inelastic.

12. Existence of complementary goods Goods or services whose demands are interrelated so that an increase in the price of one of the products results in a fall in the demand for the other. Goods which are jointly demanded are inelastic in nature.

For example, pen and ink, vehicles and petrol, shoes and socks etc have inelastic demand for this reason. If a product does not have complements, in that case demand tends to be elastic. For example, biscuits, chocolates, ice creams etc. In this case the use of a product is not linked to any other products.

13. Purchase frequency of a product
If the frequency of purchase is very high, the demand tends to be inelastic.

For e.g., coffee, tea, milk, match box etc. on the other hand, if people buy a product occasionally, demand tends to be elastic.

For example, durable goods like radio, tape recorders, refrigerators etc. Thus, the demand for a product is elastic or inelastic will depend on a number of factors.

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