Determinants of price elasticity of demand

Indian Economy glossary

Also called: Factors determining elasticity · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"

Meaning

Price elasticity of demand measures how strongly the quantity bought responds to a change in the good's own price. Its determinants are the factors that make demand sensitive or insensitive to price. NCERT gives two:

  • Nature of the good: necessities are inelastic and luxuries are elastic.
  • Availability of close substitutes: goods with close substitutes are elastic, because buyers can switch.

Standard textbooks add five more:

  • Share of budget: goods that take a small part of income are inelastic.
  • Time: demand is more elastic in the long run.
  • Habit or addiction: this makes demand inelastic.
  • How broadly the good is defined: a wider group of goods is less elastic.
  • Number of uses: a good with many uses is more elastic.

Example

Food as a whole is inelastic. But the demand for one variety of pulses is elastic, because buyers switch to another variety if its price rises. Salt is inelastic because it is a tiny share of the budget. Tobacco is inelastic because of addiction. Cars are elastic.

Don't confuse with

  • Slope of the demand curve: a flatter curve is not automatically more elastic. Elasticity compares percentage changes, not absolute changes.

Related concepts

Read more