Question

Define Price Elasticity of Demand and explain any three factors that affect it.

Hint:

Elasticity memory trick: “SNP”

• S = Substitutes
• N = Nature (luxury vs necessity)
• P = Proportion of income

More substitutes or luxury nature $\Rightarrow$ more elastic demand.

Answer 1

Step 1: Definition of Price Elasticity of Demand.
Price Elasticity of Demand refers to the degree of responsiveness of quantity demanded of a good to a change in its price, keeping other factors constant. It measures how much the quantity demanded changes when the price of a product increases or decreases.

Step 2: Factors affecting Price Elasticity of Demand.
(i) Availability of substitutes.
If close substitutes of a product are easily available in the market, the demand for that product becomes more elastic. This happens because consumers can easily switch to another product when the price rises. For example, if the price of tea increases, consumers may shift to coffee if it is available.

(ii) Nature of the good.
The elasticity of demand also depends on whether the good is a necessity or a luxury. The demand for necessities such as food grains, medicines, and basic clothing is usually inelastic because people need them regardless of price changes. On the other hand, luxury goods like expensive cars or jewellery have more elastic demand.

(iii) Proportion of income spent on the good.
If a consumer spends a large portion of their income on a particular product, the demand for that product tends to be more elastic. A small increase in price will significantly affect the consumer’s budget. However, if the product takes only a small portion of income, the demand will be relatively inelastic.

Final Answer:
Price Elasticity of Demand is the measure of how much the quantity demanded of a product changes in response to a change in its price. It is affected by factors such as availability of substitutes, nature of the good, and the proportion of income spent on the good.