FACTORS AFFECTING PRICE

ELASTICITY OF DEMAND
 Factors affecting price
1. nature of commodity
o When a commodity is a necessity(food), its demand is generally inelastic .
o When a commodity is a comfort(fan), its demand is generally elastic .
o When a commodity is a luxury(AC), its demand is generally more elastic .
LUXURIES HAVE MORE ELASTIC DEMAND AS COMPARED TO COMFORTS,WHEREAS NECESSITIES HAVE
LESS ELASTIC DEAMND.

2. AVAILABILITY OF SUBSTITUTES
o Demand for a commodity with large numbers of substitutes will be more elastic.
o For Example: A rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.
o Commodities with few or no substitutes like wheat and salt have less price elasticity of demand.

3. INCOME LEVEL
o Elasticity of demand for any commodity is generally less for higher income level groups in comparison to
people with low incomes.
o Poor people are highly affected by increase or decrease in the price of goods.
DEMAND FOR LOWER INCOME GROUP IS HIGHLY ELASTIC.
4. LEVEL OF PRICE
o Costly goods like laptop ,AC , etc. have highly elastic demand as their demand is very sensitive.
o Demand for inexpensive goods like needle is inelastic as change in prices do not change their demand.
LEVEL OF PRICE ALSO AFFECTS THE PRICE ELASTICITY OF DEMAND.
 5.POSTPONEMENT OF CONSUMPTION
o Commodities like biscuits, whose demand is not urgent have highly elastic demand.
o However, commodities like life saving drugs, whose demand is urgent have inelastic demand.
6.NUMBER OF USES
o If the commodity under consideration has several uses, then its demand will be elastic.
o EXAMPLE: Electricity is a multiple-use commodity. Fall in its price will result in substantial increase in its demand,
particularly in those uses where it was not employed formerly due to its high price.
o A commodity with no or few alternative uses has less elastic demand.
7. SHARE IN TOTAL EXPENDITURE
o Greater the proportion of income spent on the commodity, more is the elasticity of demand for it and vice-versa.
o Demand for goods like salt, tends to be inelastic.
o If the proportion of income spent on a commodity is large, then demand for such a commodity will be elastic.

8. TIME PERIOD
o Demand is generally inelastic in the shorter period.
o Demand is more elastic in long run.
ELASTICITY OF DEMAND VARIES DIRECTLY WITH THE TIME PERIOD.
9. HABITS
o Commodities which have become habitual necessities for the consumers have less elastic demand.
o Such a commodity becomes a necessity for the consumer.
o ALCOHOL , TOBACCO , CIGARETTES are some examples of habit forming commodities.