DETERMINANTS OF ELASTICITY OF DEMAND

1. The availability of close substitutes

If a good can be easily substituted for another, the demand is typically more elastic.
This means that people are likely to switch to buying a very similar good instead of
continuing to buy the good whose price increased.

Example
A close substitute would be a BIC ballpoint pen versus a Papermate ballpoint pen. If
both pens used to cost the same amount, but BIC decided to raise their price by $0.15,
then people would not find it difficult to simply switch over. This would cause a large
drop in demand for a relatively small increase in price.
The availability of close substitutes is the most important determinant of price elasticity
of demand because as long as there are substitutes available, the consumer will
gravitate toward the best deal. If one firm raises its price, it will more difficult to compete
with other producers.

2. Necessity versus luxury goods

A consumer's elasticity of demand depends on how much they need or want the good.
An example of a necessity and a good with inelastic demand would be baby diapers.
Diapers are necessary for child rearing; parents must purchase more or less the same
amount for their children's health and comfort regardless of if the price rises or falls.

If the good is a luxury good, such as a Burberry or Canada Goose jacket, then people
might choose to go with a more cost-effective brand such as Colombia if the luxury
brands decide to price their jackets at $1,000, while Colombia uses similar quality
materials but only charges $150. People will be more elastic to price fluctuations of
luxury goods.

3. The definition of the market

The definition of the market refers to how broad or narrow the range of goods available
is. Is it narrow, meaning the only goods in the market are trench coats? Or is the market
broad so that it encompasses all jackets or even all forms of clothing?
If a market is defined as "clothing" then the consumer really has no substitutes to
choose from. If the price of clothing goes up, people will still buy clothing, just different
kinds or cheaper kinds, but they will still buy clothing, so the demand for clothing won't
change much. Thus, the demand for clothing will be more price inelastic.
Now, if the market is defined as trench coats, the consumer has more options to choose
from. If the price of a trench coat rises, people may either buy a cheaper trench coat or
a different kind of coat, but they will have a choice, but in this case, the demand for
trench coats could fall substantially. Thus, the demand for trench coats will be more
price elastic.

4. The time horizon

The time horizon refers to the time in which the consumer must make their
purchase. As time goes by, demand tends to become more elastic as consumers have
time to react and make adjustments in their lives to account for price changes. For
example, if someone relied on public transport for daily commuting, they will be inelastic
about a change in the ticket fare over a short period. But, if the fare increases,
commuters make other arrangements in the future. They may choose to drive instead,
carpool with a friend, or ride their bike if those are options. They simply needed time to
react to the change in price. In the short run, consumer demand is more inelastic but, if
given time, it becomes more elastic.

DETERMINANTS OF ELASTICITY OF SUPPLY

1. Factor Mobility of Production
Factor mobility of production refers to the transfer of resources from one production
function to another. When the price of a product goes up, the supply of that product can
be increased in a short period of time by getting the inputs required for that product from
other products.
Thus, when resources can be easily transferred from one production function to
another, supply can be increased in a short period of time as the price of that
commodity increases.
Example: Factor Mobility of Production
If the price of tea goes up, the land used for coffee production, labor, capital, etc. can be
used to make tea. Therefore, once the price of tea goes up, the supply of tea can be
increased as resources can be obtained from coffee for tea production.
Accordingly, an elastic supply condition exists as the factor mobility increases.
Example: Resources used in agricultural production cannot be used in industrial
production. Primary inputs are used for agricultural production. But secondary inputs are
used for industrial production.
Accordingly, an inelastic supply condition exists when the factor mobility is reduced.
2. Nature of the Goods
The nature of the product is the ability to substitute a product factor used to produce a
product for another production function.
The supply is elastic if the replacement capacity is higher. The supply is inelastic when
the replacement capacity is low.
Example: Nature of the goods
The resources used to make the tables can be easily substituted for the production of
the beds. Therefore, when the price of bedding products goes up, the resources used
for tables can be replaced with beds. Then the supply of beds will increase and the
supply of tables decrease.
Accordingly, if replacement capacity is higher, supply will be elastic.
3. Availability of Storage Facilities
There is an elastic supply for that product if the ability to maintain stocks is high. There
is an inelastic supply if inventories are difficult to maintain.

Stock management is key for a product’s continual manufacturing.

Example: Availability of Storage Facilities

Cars may maintain in quantity when it comes to automobile manufacture. However, if
we focus on potato production, potatoes cannot be stored in mass for a longer length of
time. Because it is difficult to maintain stocks, there is an inelastic supply here.

4. The Time that Takes to Adjust the Supply

The longer it takes to increase supply after a price change, the greater the chance of
factor mobility of production, so supply is elastic.
If the time taken to increase supply after a price change is short, there is an inflexible
supply for such goods. This is because the factor mobility of production is limited.
Example: The Time that Takes to Adjust the Supply
For agricultural goods, there is an inelastic supply condition. This is because, even if the
price of an agricultural item increases, producing that commodity takes a long time. As a
result, even if the price of a commodity rises, it is not possible to increase supply
immediately.