DETERMINANTS AND SIGNIFICANCE OF PRICE ELASTICITY

• DETERMINANTS  AND SIGNIFICANCE OF PRICE ELASTICITY
  CA AND CS FOUNDATION BUSINESS ECONOMICS
• DETERMINANTS  ( FACTORS)OF PRICE ELASTICITY
• NATURE OF THE COMMODITY:

1. NECESSARY:LESS ELASTIC
2. COMFORTS:MODERATELY ELASTIC
3. LUXURY:MORE ELASTIC

• SUBSTITUTES: COMMODITIES HAVING MORE SUBSTITUTES HAVE MORE ELASTIC DEMAND. BUT FOR THE GOODS WHICH DOES NOT HAVE SUBSTITUTE LESS ELASTIC
• Variety OF USES: - THE DEMAND FOR GOODS HAVING VARIETY OF USES SUCH AS MILK,COAL,ELECTRICITY IS MORE ELASTIC.
• POSTPONEMENT OF THE USE:- COMMODITIES WHOSE CONSUMPTION CAN BE DEFERRED HAVE AN ELASTIC DEMAND AND WHOSE DEMAND CAN NOT BE POSTPONED HAS LESS ELASTIC
• RANGE OF THE PRICES:- ALSO DEPENDS UPON THE RANGE OF PRICES. AT VERY HIGH AND AT VERY LOW PRICES THE DEMAND TENDS TO BE INELASTIC. ON THE OTHER HAND MIDDLE RANGE OF PRICES DEMAND WILL BE ELASTIC.
• PROPORTION OF INCOME SPENT ON A COMMODITY:GOODS ON WHICH SMALL PORTION OF THE INCOME HAVE INELASTIC, FOR EXAMPLE NEWSPAPER,TOOTHPASTE,SHAVING CREAM ETC ON  THE OTHER HAND,GOODS ON WHICH CONSUMER SPENDS A LARGE PROPORTION OF HIS INCOME HAVE ELASTIC DEMAND
• HABITS: DEMAND FOR THOSE GOODS IS INELASTIC PEOPLE ARE HABITUAL LIKE CIGARETTE,COFFEES ETC. DESPITE RISE IN PRICE,DEMAND SUCH GOODS MORE OR LESS SAME QUANTITY
• TIME FACTOR:SHORTER THE TIME LESSER WILL BE THE ELASTICITY OF DEMAND  AND LONGER THE TIME THE HIGHER WILL BE THE ELASTICITY OF DEMAND
• JOINT DEMAND:THE DEMAND FOR GOODS DEMANDED JOINTLY DEMAND IS INELASTIC. CAR AND PETROL ETC. RISE OF PRICE OF PETROL MAY NOT CONTRACT ITS DEMAND IF THERE IS NO FALL IN DEMAND FOR CARS
• DURABILITY OF GOODS:-ELASTICITY OF DEMAND DEPENDS UPON DURABILITY OF THE COMMODITY WHEN GOODS ARE DURABLE LIKE FRIDGE,TV,CAR ETC,THE DEMAND IS INELASTIC BECAUSE PEOPLE DO NOT BUY MORE OF THESE GOODS WHEN THEIR PRICE FALL.
• BUDGET POSITIONS: THE DEMAND FOR SOAP,SALT.MATCHES GOODS ARE HIGHLY INELASTIC. BUT TV,FRIDGE  ETC HAVE ELASTIC DEMAND.
• CLASSES OF BUYERS:THE ELASTICITY OF DEMAND FOR A COMMODITY DEPENDS UPON THE CLASS OF BUYER. COMMODITY CONSUMED BY WEALTHY AND WELL TO DO CLASS OF PEOPLE HAVE INELASTIC DEMAND.THE COMMODITY WHICH IS CONSUMED BY POOR SECTION ARE OF ELASTIC DEMAND.
• IMPORTANCE OF PRICE ELASTICITY OF DEMAND
• DETERMINATION OF PRICE UNDER MONOPOLY: TAKEN INTO ACCOUNT WHILE DETERMINING THE PRICE:

1. IF IT IS ELASTIC,LOW PRICE BECAUSE IT WILL BRING MORE REVENUE
2. IF IT IS INELASTIC,HIGH PRICE

• PRICE DISCRIMINATION:-IN MONOPOLY SELLS HIS PRODUCTS AT DIFFERENT PRICES IT IS CALLED PRICE DISCRIMINATION PRICE FOR DEMAND INELASTIC AND LESS PRICE FOR THOSE WHOSE DEMAND IS MORE ELASTIC
• PRICE DETERMINATION OF JOINT SUPPLY: GOODS WHICH ARE PRODUCED SIMULTANEOUSLY IN SAME PRODUCTION PROCESS LIKE COTTON AND COTTON SEEDS . IF DEMAND FOR COTTON IS LESS ELASTIC THEN HIGH PRICE AND COTTON SEED IT IS MORE ELASTIC IT WILL BE  LESS

• BENEFICIAL TO FINANCE MINISTER:- TAXES ON GOODS HAVING ELASTIC DEMAND WILL YIELD LESS REVENUE AND GOODS HAVING LESS ELASTIC WILL ATTRACT MORE TAXES
• DISTRIBUTION OF THE BURDEN OF TAXATION:-IF THE DEMAND FOR THE GOOD IS INELASTIC,THE TAX BURDEN WILL BE MORE ON CONSUMER VICE VERSA
• INTERNATIONAL TRADE:-IF THE DEMAND FOR THE GOODS EXPORTED IS INELASTIC, A COUNTRY WILL GAIN BY INCREASING MORE PRICE AND VICE VERSA
• WAGE DETERMINATION:-IF THE DEMAND FOR THE SERVICES OF THE LABOURERS IS ELASTIC,THE POSSIBILITY OF GETTING THEIR WAGE HIKE IS REMOTE AND VICE VERSA.
• PARADOX OF POVERTY:-IN AGRICULTURE WHEN THERE IS MORE PRODUCTION BUT THE FARMERS ARE NOT GOING TO BENEFITS. MORE PRODUCTION,MORE SUPPLY LESS PRICE.DEMAND IS INELASTIC
• EFFECT ON EMPLOYMENT:-

1. EFFECT OF AUTOMATIC MACHINES ON EMPLOYMENT DEPENDS UPON ELASTICITY OF DEMAND
2. INITIALLY USE OF SUCH MACHINES CAUSES UNEMPLOYMENT AND PRICES OF THE GOODS WILL FALL
3. IF DEMAND IS MORE ELASTIC, THEN THEIR WILL BE MORE DEMAND
4. GREATER DEMAND WILL STIMULATE GREATER PRODUCTION AMD MORE EMPLOYMENT AND VICE VERSA

• NATIONALIZATION POLICY: GOVERNMENT WILL NATIONALIZE THOSE ENTERPRISES DEMAND FOR THOSE IS INELASTIC