Q.What do you mean by Price Elasticity of Demand? Explain the factors affecting it.
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →Price elasticity of demand measures how quantity demanded responds to a price change; it depends on the nature of the good, substitutes, number of uses, income proportion, habits and time.
Meaning: Price elasticity of demand (Ed) is the degree of responsiveness of the quantity demanded of a commodity to a change in its price. It is measured as Ed = percentage change in quantity demanded ÷ percentage change in price.
Factors affecting price elasticity of demand:
-
Nature of the commodity — Demand for necessities (salt, medicines) is inelastic (people buy them whatever the price), while demand for luxuries and comforts is elastic.
-
Availability of substitutes — If close substitutes are available (e.g. tea and coffee), demand is elastic, because a rise in price makes buyers switch to the substitute. Goods with no close substitutes have inelastic demand.
-
Number of uses — A commodity that has many uses (e.g. electricity) has elastic demand, because at a low price it can be put to more uses, and at a high price it is used only for the most important purposes.
-
Proportion of income spent — If only a small fraction of income is spent on a good (e.g. matchboxes, salt), its demand is inelastic; if a large fraction is spent on it, demand is more elastic.
-
Habits of the consumer — Goods a consumer is habituated to (e.g. tobacco for a smoker) have inelastic demand, because the consumer buys them even if the price rises.
…
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.