Determinants of price elasticity of demand
Price Elasticity of Demand (PED) measures how responsive the quantity demanded of a product is when its price changes. Several factors determine whether demand is elastic (very responsive) or inelastic (less responsive).
1. Substitutes
This is the most important determinant of PED.
If a product has many close substitutes, demand will be price elastic because consumers can easily switch when the price rises.
Examples
Bananas, chocolate bars → Elastic demand
Toothpicks, prescribed medicines → Inelastic demand
2. Proportion of Income Spent
The greater the proportion of income spent on a product, the more elastic its demand tends to be.
If the product costs only a small part of income, demand will be inelastic.
Examples
Salt or toothpicks → Small spending → Inelastic
Expensive cruise holidays → Large spending → Elastic
3. Necessity vs Luxury
Necessities tend to have price inelastic demand because people need them.
Luxuries tend to have price elastic demand.
Examples
Food, fuel, medicine, housing → Inelastic
Designer clothes, luxury watches → Elastic
Time-based necessity example
Flowers on Valentine’s Day or Mother’s Day may have inelastic demand because people strongly want them during that time.
4. Habits, Addictions, Fashion and Tastes
Products that are habit-forming or very fashionable usually have price inelastic demand.
Consumers continue buying them even if prices increase.
Examples
Tobacco products
Items linked to hobbies like sports or music
5. Advertising and Brand Loyalty
Advertising can increase demand and build brand loyalty.
Loyal customers are less sensitive to price changes, making demand more inelastic.
Examples
Popular brands such as Coca-Cola, Apple, Samsung, Chanel, Toyota, and Mercedes-Benz.
6. Time
Demand is usually more inelastic in the short run because people cannot change habits quickly.
In the long run, demand becomes more elastic as consumers find alternatives.
Examples
Parents may continue paying private school fees even if prices increase.
Car owners may continue buying fuel initially, but over time they may seek alternatives.
7. Durability of the Product
Perishable goods must be replaced quickly, so demand is usually inelastic.
Durable goods can be used for a long time, so people may delay buying them if prices rise, making demand more elastic.
Examples
Fresh milk → Inelastic
Furniture, televisions, motor vehicles → Elastic
8. Costs of Switching
If it is difficult or expensive to switch to another brand, demand becomes more inelastic.
Companies sometimes create barriers to switching.
Examples
Different chargers, memory cards, or software in electronic devices
Long contracts for mobile phones or satellite TV services
9. Breadth of Definition of the Product
If a product is defined broadly, demand tends to be more inelastic because substitutes are limited.
If it is defined narrowly, demand is more elastic.
Examples
Food (broad category) → Very inelastic
Specific products like carbonated soft drinks or beef → More elastic