Elasticity of Demand

Elasticity of demand refers to the degree of responsiveness to change in the demand of a product or services and its price.

The formula for the elasticity of demand has been given below:

Elasticity of demand = Percentage change in quantity demand / Percentage change in price

Elasticity of demand is influenced by a number of factors. A few of them have been discussed below.

The very first thing that influences elasticity of demand is the level of price. The demand for the luxurious goods that rich people consume is not influenced by the change in prices. This is because they don’t bother much about the prices as they are already able to pay them. When we talk about the goods that are cheap, then their demand is not affected by the price because they are the products of daily use which people have to buy whether they like it or not.

Another thing that might influence elasticity of demand is the availability of substitutes. If the price of one commodity rises then consumers will tend to move to buying the substitute of that product. We can take the example of wheat and rice. When the prices of wheat will rise, then people will move onto buying rice. On the other hand, those products which do not have any substitutes have inelastic demand.

Habits of people also influence the elasticity of demand. Those people who are in the habit of making some purchase do not care about the fall or rise in their prices. For example, the person who smokes cigarettes will not stop consuming it even its price is raised.

Apart from this, the proportion of income spent on a product also influences elasticity of demand. If a small proportion of income will be spent on some product then its demand will be inelastic and vice versa.