6.2 Determinants of Elasticity of Demand

Factors that determine the elasticity of demand would be the availability of substitutes, the share of the good’s expense in individuals’ income, and the passage of time.

More substitutes imply individuals have more choices and therefore consumers are more sensitive to price changes. The availability of substitutes makes the goods relatively more elastic. Conversely, less substitutes give consumers less choices and therefore goods with low substitutes are relatively less elastic or inelastic. Usually, necessities have less substitutes such as gasoline, medicines, and certain food items such as milk. Because consumers have less choices available, they are less sensitive to price changes, i.e. when the price rises, people cannot make significant changes to their consumption.

Also, another factor that determines elasticity is the passage of time. Take the example of gasoline. When gas prices rise, people cannot cut their consumption very much as it is a necessity and also people cannot change their driving habits quickly. However, as gas prices keep rising we will likely see the elasticity of demand for gasoline increase slightly (i.e. gasoline could become relatively less inelastic) as people start carpooling, taking public transportation, and/or switching to hybrid or electric vehicles.

Goods that take up a larger share of individuals’ expenses are likely to be more elastic such as expensive items or luxury items. A rise in the price of these expensive items could make consumers more sensitive to the price change. Conversely, goods that are relatively cheap and take up a smaller share of individuals’ expenses are likely to be less elastic or relatively inelastic. A rise in the price of these cheaper goods may not make consumers too sensitive to the price change because the share of these items in individuals’ budget is much less, such as certain food items like salt and sugar.

Fig 6.5 below shows a selection of demand elasticities for different goods and services drawn from a variety of different studies by economists, listed in order of increasing elasticity.