What are the determinants of elasticity of demand?

Answer 1

Price Elasticity of Demand [PED] is determined by

1. The number and 'closeness' of substitutes: A unique and desirable product is likely to exhibit an inelastic demand with respect to price.
2. The degree of necessity of the good: A necessity like bread will be demanded inelastically with respect to price.
3. Whether the good is habit forming: Consumers are also relatively insensitive to changes in the price of habitually demanded products.
4. The proportion of consumer income which is spent on the good: The PED for a daily newspaper is likely to be much lower than that for a new car!
5. Whether consumers are loyal to the brand: Brand loyalty reduces sensitivity to price changes and reduces PED.
6. Life cycle of product: PED will vary according to where the product is in its life cycle. When new products are launched, there are often very few competitors and PED is relatively inelastic. As other firms launch similar products, the wider choice increases PED. Finally, as a product begins to decline in its lifecycle, consumers can become very responsive to price, hence discounting is extremely common.