FACTORS AFFECTING ELASTICITY OF DEMAND AND THE IMPORTANCE OF ELASTICITY OF DEMAND
What are the factors affecting elasticity of demand.
The following factors are what affects the elasticity of demand
- The income of the consumer: The higher the consumer’s income, the more inelastic his demand for goods and services will tend to be.
- Close substitute of a commodity: Commodities which have close substitutes tend to have a high price elasticity of demand while those that do not have close substitutes are likely to be inelastic.
- Nature of commodity: Whether the commodity is necessity or a luxury item it will affect the elasticity of demand. Any item that is considered necessary will always be demanded even if the price is increased, i.e. the good is inelastic in demand. Luxury goods on the other hand are highly elastic in demand.
- One’s habit: When one forms a habit on the consumption of a commodity, a change in the price of that commodity will not affect one’s demand for it.
- Number of uses to which a commodity is put: It is known that the more commodities can be put into several the more elastic the demand becomes vice versa.
IMPORTANCE OF ELASTICITY OF DEMAND
- Increase in revenue: It helps producers or sellers to increase the revenue in a bid to raise the prices of a commodity. This will depend whether their goods are inelastic
- Determination of maximum output: also helps the producers to determine maximum output to produce in order ensure higher turnover and profit.
- Determination of cross elasticity: helps the producer to determine which goods to produce more when goods the same substitutes exist.
- Imposition of taxes by government Elasticity of demand helps die government in determining the imposition of taxes goods and services.