Briefly discuss the factors that determine the size of elasticity of demand?

Another factor is the amount of income available to spend on the good. This factor refers to the total a person can spend on a particular good or service. If a small proportion of total expenditure is spent on a commodity, its demand will be inelastic such as demand for salt. On the other hand, if a major portion of total expenditure is spent on a commodity, its demand will be more or highly elastic such as demand for luxuries.

Another factor is the amount of time available. Longer is the time period more elastic is the demand. In the short period if price of a commodity like petrol is increased, its demand will not fall immediately and hence it would be inelastic or less elastic. But if period is longer alternative sources of energy can be developed and hence demand would be elastic.

Another factor is price level of the commodity. Generally, the demand for very costly and very cheap goods is elastic. Very costly goods are demanded by the rich people and hence their demand is not affected much by changes in prices. For example, increase in the price of Maruti Car from Rs. 3, 00,000 to Rs. 3, 20,000 will not make any noticeable difference in its demand. Similarly, the changes in the price of very cheap goods (such as salt) will not have any effect on their demand, for a very small part of income is spent on such commodities.

One other factor is the nature of the commodities whether it’s a necessity or luxury. Generally, the demand for necessaries is inelastic and that for comforts and luxuries of life elastic. This is so because certain goods which are essential to life will be demanded at any price, whereas goods meant for luxuries and comforts can be dispensed with easily if they appear to be costly.

Another factor is habit forming goods. Some products which are not essential for some individuals are essential for others. If individuals are habituated of some commodities the demand for such commodities will be usually inelastic and vice versa, because they will use them even when their prices go up. A smoker generally does not smoke less when the price of cigarette goes up.

One other factor is postponement of the use of the commodity. Usually the demand for such commodities whose use can be postponed for some time is elastic. For example, the demand for V.C.R. is elastic because its use can be postponed for some time if its price goes up, but the demand for rice and wheat is inelastic because their use cannot be postponed when their prices increase.

The last major factor is whether the good has various uses or not. Generally, a commodity which has several uses will have an elastic demand such as milk, wood etc. On the other hand, a commodity having only one use will have inelastic demand. (707 words)

1. Find the value of elasticity and discuss the relationship between the commodities and with the price. Also suggest the producer how to maximize revenue?

a)

Change in price = 11.1 %

Change in quantity = -40.0%

Elasticity = -3.63

As the price of the commodity increases, the demand of the commodity decreases. The price elasticity of demand of the commodity is above 1 so the demand is elastic. A short change in price produced a big change in demand. So the demand of commodity is very responsive. The decrease in price will increase the revenue. The commodity has many substitutes so the consumer has shifted to its commodities and its demand fell.

b)

Change in Income = 25 %

Change in quantity = - 40 %

Elasticity = - 1.6

As the income of consumer increases, the demand of the commodity decreases. The income elasticity of demand of the good is negative meaning that it is an inferior good. The commodity’s demand decreases at any given price as the income of consumer increases. So the producer must add value to the good to reduce its inferiority and drop the price to attract customers. In this way he or she could increase revenue.

c)

Change in price of A commodity = 11.1 %

Change in quantity of B commodity = -30.0 %

Elasticity = -2.7

Quantity demanded of one good has fallen down as the price of the other good has increased. Moreover, the Cross elasticity of demand is negative. Consequently, both goods are complements. They are to be used together. Elasticity is above 1 showing that the demand of B good is changing more then the price changing of A good. The price of the A commodity must be reduced in order to maximize revenue.

d)

Change in price = - 88.8 %

Change in quantity = -40.0 %

Elasticity = 0.45

As the price of the commodity decreases, the demand of the commodity decreases. The price elasticity of demand of the commodity is below 1 so the demand is inelastic. A big change in price produced a short change in demand. So the demand of commodity is less responsive. The   increase in price will increase the revenue. The commodity don’t have many substitutes and is a necessary good.