DETERMINANTS OF Ed

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Determinants of Price Elasticity of Demand

Various factors influence the price elasticity of demand. Here are some of them:

1. Substitution Effect: If a product can be easily substituted, its demand is elastic, like Gap's jeans. If a product cannot be substituted easily, its demand is inelastic, like gasoline.

2. Luxury Vs Necessity: Necessity's demand is usually inelastic because there are usually very few substitutes for necessities. Luxury product, such as leisure sail boats, are not needed in a daily bases. There are usually many substitutes for these products. So their demand is more elastic.

3. Income Effect: The larger the percentage of income spent on a good, the more elastic is its demand. A change in these products' price will be highly noticeable as  they affect consumers' budget with a bigger magnitude. Consumers will respond by cutting back more on these product when price increases. On the other hand, the smaller the percentage of income spent on a good, the less elastic is its demand.

4. Time lag: The longer the time after the price change, the more elastic will be the demand. It is because consumers are given more time to carry out their actions. A 1-day sale usually generate less sales change per day as a sale lasted for 2 weeks.

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