Answer in Detail: Various factors influence Elasticity of Demand.

Various factors influence Elasticity of Demand.

Answer: Elasticity of demand is affected by a variety of factors as described below.

1. Nature of a Good- The price elasticity of demand depends on the nature of a good. The goods and services can be broadly divided into three categories- Necessities, Luxuries, Jointly-demanded goods. For instance, necessities have inelastic demand (|ed| < 1). On the other hand, luxury goods have high price elasticity. 

2. Substitutes- The demand for a good that has more number of substitutes available will be relatively more elastic. On the contrary, if a good has no close substitutes, then it will have an inelastic demand.

3. Several Uses- A commodity that can be used for different purposes (such as milk) will have an elastic demand. This is because if the price of this commodity increases, then it will be used only for important purposes leading to a drastic fall in demand. On the contrary, a good that has limited usage will have an inelastic demand.

4. Consumers' Income- People with very high or very low incomes have an inelastic demand as the change in the price of a good will have lower impact on the consumers' demand for that good. On the contrary, the middle-income earners will have an elastic demand as their demand is very responsive to the prices of goods.

5. Consumers' Habits- The goods that a consumer is habituated to such as, liquor, cigarettes, etc. have an inelastic demand.  A change in the prices of these goods has lesser impact on their demand as the consumer is habituated to these goods and hence cannot reduce their consumption.

6. Period of Time- In the short run, the demand is inelastic as a consumer would not have the time to change his/her habits and long-time practices. However, in the long run, the demand would be elastic as he/she would get time to change his/her habits.

7. Income Spent on Goods- The goods that account for a very small proportion of a consumer’s income such as, newspaper, etc. will have an inelastic demand. On the other hand, the goods that account for a very large proportion of a consumer’s income such as, clothes, house rents, etc. will have an elastic demand.

8. Possibility of Postponement of Demand- Demand for those commodities whose consumption can be postponed will be price elastic. As against this, those commodities that are urgently required and whose consumption cannot be postponed will have an inelastic demand.

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