Factors Influencing Elasticity of Demand

By Dr. KS Arun Kumar

Nature of commodity Availability of substitutes Number of uses Consumers income Height of price and range of price change Proportion of expenditure Durability of the commodity

Habit Complementary goods Time Recurrence of demand Possibility of postponement

Classification of price Elasticity of Demand : Recapitalisation

In economic analysis, usually, the possible degrees/coefficient values of the price elasticity of demand are divided in terms of unity (i.e.,1) into five general categories: Unitary elastic demand: e = 1 Elastic demand: e > 1 Inelastic demand: e < 1 Perfectly elastic demand: e = alpha Perfectly Inelastic demand: e = 0 The Last two categories are theoretical extremes and rarely found in pratice.

The classification of price elasticity of Demand

Degree of Price Elasticity (e) Types of Price Elasticity of Demand (1) e = 1 (2) e > 1 (3) e < 1 (4) e = alpha (5) e = 0 Unitary Elastic Elastic Inelastic Perfectly Elastic Perfectly Inelastic

Types of Income Elasticity

Unitary Income Elasticity Income Elasticity greater than Unity Income Elasticity Less than Unity Zero Income Elasticity Negative Income Elasticity

Applications of Income Elasticity

Long term business planning: In the long run Demand for comforts and luxury goods may tend to be highly income elastic (long run: growth bright) Marketing strategy (I,e,d helpful in developing market strategies Housing development strategies: can be predicted (page 174, combined effects of elas. Of demand )

Cross Elasticity of Demand

Cross price Elasticity Positive value suggests substitute products Negative value suggests complementary products Definition: The cross Elasticity demand refers to the degree of responsiveness of demand for a commodity to a given change in the price of some related commodity.

Prop.percent.change In D for X Cross Elasticity of Demand = Prop.Percent.change In price of Y (p175-176,177: problems)

Advertising/promotional.E.D
In case of several products, the market demand is influenced through advt or promotional efforts Qx=function of (A) Where Qx=Demand for product X A=advt. expendicture