Explain the four important factors affecting the price elasticity of demand.

Price elasticity relating to demand represents an assessment of responsiveness of demand for a certain good to alterations in its price.

The four crucial factors influencing the price elasticity of demand are:

(A) Quantity of close substitutes - Higher the quantity of close substitutes present in the market, the more elastic the demand is due to the easiness found by the consumers to switch.

(B) Ratio of income of consumers allocated to expenditure on the good – If buyers expend smaller ratio of their income on some good, then they would not significant reduce their purchase of the good as its price enhances. Contrarily, because buyers expend smaller ratio of their income on a certain good, they purchase the good more or less as per the need at any specific price. Thus, it is not necessary for the purchase to enhance with a reduction in the price of some good. Thus, products taking up a high proportion of consumer’s income tend to exert a more elastic demand while those taking up a smaller proportion exert lesser elastic demand.

(C) Habits – Habit play a crucial role in determining level of elasticity of demand for some good. Sometimes some individuals totally surrender to consumption of addictive articles like alcohol, tobacco and drugs. As a result, if the prices of such goods enhance, their demand does not reduce significantly and so their elasticity of demand tends to be comparatively small.

(D) Price of Goods – Elasticity of demand for some good is also based on its own price. As the price alters, amount demanded of the good also alters, following the law of demand. Commonly, as low the price of a certain good gets, the lesser is the elasticity relating to its demand since when the price is very small, an alteration in price would exert no significant effect on demand.