Price Elasticity of demand refers to the percentage change in quantity demanded to the percentage change in price and it measures the percentage of change in demand due to change in the price of the product which may be affected by various reasons like availability of substitutes, consumer habits, etc.
Determinants of Price Elasticity of Demand:
- Price Range of the product:
The price Range of the product affects the price elasticity of demand as with the change in the price the demand generally affected because price and demand have inverse relationship.
2. Nature of Product:
The nature of the product also affects the price elasticity of demand. Generally, much change in demand due to change in price can be seen in luxurious goods and not the necessity goods. The necessity goods have inelastic demand hence they have zero income elasticity of demand.
3. Income group of consumer:
Generally, in the middle class and lower class income group, the positive price elasticity of demand can be seen whereas in higher or rich class income group, price elasticity of demand cannot be seen as they do not concern about the price of the product and they focus on the quality of product due to affordability of products by them.
4. Availability of Substitutes:
Generally if substitutes are more available at less price then the price elasticity of demand have major affect with change in price.
5. Benefit from product:
If product can be used in multiple ways then the demand is elastic and if it is restricted to single use the demand will be less elastic. For example: Milk is used for preparing curd, butter milk, milk shakes, sweets etc. If the price falls the demand increases and if price rises the demand will be restricted to the single and basic use.
6. Complementary goods:
The price elasticity of demand also affects the complementary goods. For example with Mobile, charger is also used and if the demand of mobile rises the demand of charger automatically raises.
7. Type of Markets:
Generally the narrow markets have inelastic demand as there is mostly single shop for single product whereas in wide markets the demand is elastic as there is more scope for bargaining of the product.
8. Consumer habits:
If the consumer is addicted to the product then price elasticity of demand does not affect the demand for the product. For example: Johnsons baby products have captured the market for all baby products and consumers have faith in it hence the demand of their product is inelastic.
Price elasticity of demand is the measurement of percentage change in demand to percentage change in price. Some products show very drastic change in demand due to small change in price and vice versa this might be because of various determinants of price elasticity of demand. The major determinants of price elasticity of demand are availability of substitutes, nature of products, consumer income, consumer habits, quality of products, nature of market, price of product etc. Price elasticity of demand helps the firms for deciding the pricing strategy of the product.