Question

Identify the factors that affect price elasticity of demand and supply.

1. Add more products or services to those given in Table 4.2 (p. 125). Fill in the table below:

For a poor family

For a wealthy family

2 commodities that have elastic demands	2 commodities that have elastic demands
2 commodities that have inelastic demands	2 commodities that have inelastic demands

2. Are there any differences between the two families? Why?
3. What is the elasticity of illegal goods?
   1. For sin products, like cigarettes?
   2. Would this be the same for each family type listed in the table above?

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Answer 1

Factors affecting price elasticity of demand:-

1) Nature of commodity- Ordinarily, necessities like salt,kerosene,oil,matchboxes,textbooks, etc., have inelastic demand. Luxury is like air conditioner, costly furniture fashionable garments, etc., have elastic demand. Jointly demanded goods, like bread and butter, pen and ink, camera and film ordinarily show a moderate elasticity of demand. For example,rise in price of butter will not substantially reduce its demand if the demand for bread has not decreased.

2) Availability of substitutes- Demand for goods which have close substitute like tea and coffee is relatively more elastic. Because when price of such a good rises the consumer have the option of shifting to its substitute. Goods without close substitutes like cigarettes and liquor have inelastic demand.

3) Multiple uses- Goods which can be put to multiple users have elastic demand. Electricity is an example. It is used for lighting, room heating, air conditioning etc. if the price of electricity increase, its use may be restricted only to important purpose like lighting. Accordingly elasticity of demand is high.

4) Postponement of use- Demand will be elastic for goods,the consumption of which can be postponed. Demand for residential houses may be cited as an example. People lower their demand for residential houses when interest rates on the loans are high.

5) Habits of consumers- Goods to which consumer become habitual or addicted will have any elastic demand. Cigarettes and liquor are examples. Demand for cigarettes and liquor does not reduce even when these goods are highly taxed.

Factors affecting price elasticity of supply are:-

1) Nature of inputs used- The elasticity of supply depends on the nature of inputs used for the production of a commodity. If commonly available inputs are used, supply will be elastic. If inputs used are not commonly available, supply will be inelastic.

2) Natural constraints- The elasticity of supply is significantly influenced by the natural constraints full stop if we wish to produce the teak wood, it will take years of plantation before it becomes usable. Supply of teak wood will ,therefore, be less elastic.

3) Nature of the commodity- Perishable goods are relatively less elastic in supply than durable goods because perishable goods have a shorter shelf life than the durable goods.

4) Time factor- Longer the time period, greater will be the elasticity of supply. Because, over a long period of time, factors are easily available and supply can be easily increased.

5) cost of production- Elasticity of supply is also influenced by cost of production. Supply will be less elastic in case if production causes a substantial increase in the cost of production.

For wealthy families
Goods having elastic demand: airline tickets- airline tickets are sold in competitive market. Buyers can easily compare price. If the cost is too high, they can easily choose other airline.
Goods having inelastic demand:  
iPhone
Demand for iphone is less price sensitive as it is symbol of status.

For poor families:
Goods having elastic demand:
Tea
Poor people have low purchasing power. Demand for tea for them may be affected by its substitute. As there many substitute for tea available in the buyer. Buyer may switch their demand to some other brand of tea if the price is high.

Goods having inelastic demand:
Salt:
As there no close substitute of salt, the demand for salt by poor people is inelastic.

The types of goods that both groups consume, has different elasticity of demand.

Poor people have less purchasing power in comparison to rich people.
For example
Incase of mobile phones
Demand for mobile may be elastic for poor but for rich it is inelastic as they are fond of particular brand.
In case of tea also, poor people have elastic demand as the price rises they switch to its substitute. However rich people have strong purchasing power, their demand for tea is inelastic.

Elasticity of illegal goods like illegal drugs is inelastic. Even when their price rises, there demand doesn't respond much to the price change. Only the spending of the drug user increases.

Smoking is a habit, therefore the elasticity for cigarettes is less elastic or inelastic. Change in quantity demanded is less in response to price increase.

Elasticity of demand for sin product for rich and poor is same. As I mentioned above also, sin Product are those of which people are habitual. In case of addiction and habit, demand is inelastic. No matter whether they are consumed by rich or poor.