Determinants of Elasticity
- Availability
of substitutes:
The more substitute a
commodity has, the more elastic the demand will be for that commodity
If a commodity
increases in price and there is substitute for it, people will switch to the
substitute.
If the commodity
decreases in price, people will search for ways to substitute it for a higher
price product.
The demand for
commodity will become more elastic in the long run than in the short run when
price rises, because many adjustment to price take time to achieve
- Number
of uses of the commodity
If a commodity has a
number of uses, the demand for it will tend to be elastic. This is because
people will use it in many different ways as the price declines.
The demand for a
commodity will become more elastic in the long run than in the short run when the
price falls, because more uses will be found for a commodity in a longer period
of time.
- The
necessity of the commodity:
The demand for a
commodity that is a necessity will tend
to be inelastic.
- The
cost of the commodity relative to the income:
If a commodity takes a
larger share of a person’s income, the demand for that commodity will be
elastic. If the commodity takes a small share of a person’s income, the demand
for that commodity will be inelastic.
Reviewing the determinants of elasticity
The
first determinant is availability of substitutes. Do you know a commodity that
has many substitutes? Going to the theatre has many substitutes. Consider the
following conversation:
Juan
: “ hey, Guys, do you want to go to see
the latest Broadway show? My friend told me that it is worth paying the
Broadway show of Ms. Lea Salonga”.
Carlo : “ No. the price of tickets has just gone up.
I’m going to stay home and watch TV.”
Miguel
: “In that case, I’m going to go see the latest
Kristin Hermosa film, it is much
cheaper to watch a movie than to see a Broadway Play “.
Hans
: “Spend an added Pesos for a play? No, I’m going to eat with my girl tonight”.
So
you see the demand for a theatre tickets will be elastic because of the many
substitutes available.
The
second determinants is the number of uses of a product.
How many uses do you think a paper clip has? I
can think of at least three. It can be used to keep paper together, of course;
it can be used as a hair curler, and a lock pick. Because it has many uses, as
the price declines for a paper clip, people will use it in many different ways.
The
third determinant of elasticity of demand is the necessity of commodity.
Medicine tends to a necessity especially if a particular diseases needed a certain
medicine. For example, demand for insulin is inelastic because a diabetic must
have it.
The
fourth determinant of elasticity of demand is cost of the commodity, relative
to income. If an item takes a small share of a person’s income, the demand for the
commodity will be inelastic. For instance, if salt rises in price, people will
still buy it not only because they consider it necessary for good eating but
also because it takes such a small share of their income. On the other hand, if
stereos increase in price, people will buy fewer stereos because they are
items which take a relatively large
share of income. In this case, the demand for the commodity is elastic.
Related Topics
·
Introduction of Microeconomics
·
Scarcity
·
Production possibilities
·
Basic Economic Problem
·
Circular
flow of Economic Activity
·
Common
types of Economic System
·
Economic resources
·
Demand supply and markets
·
Demand
·
Supply
·
Elasticity of demand and supply
·
Market
·
Surplus
·
Shortage