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Study notes

Factors Affecting Price Elasticity of Demand

  • Levels: GCSE, AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

What are the main factors that affect the coefficient of price elasticity of demand?

A number of factors come into play in determining whether demand is price elastic or price inelastic in a given market

Factors Affecting Price Elasticity of Demand - Revision Video

Factors affecting price elasticity of demand

  1. The number of close substitutes – the more close substitutes there are in the market, the more elastic is demand because consumers find it easy to switch. E.g. Air travel and train travel are weak substitutes for inter-continental flights but closer substitutes for journeys of around 200-400km e.g. between major cities in a large country.
  2. The cost of switching between products – there may be costs involved in switching. In this case, demand tends to be inelastic. For example, mobile phone service providers may insist on a12 month contract which has the effect of locking-in some consumers once a choice has been made
  3. The degree of necessity or whether the good is a luxury – necessities tend to have an inelastic demand whereas luxuries tend to have a more elastic demand. An example of a necessity is rare-earth metals which are an essential raw material in the manufacture of solar cells, batteries. China produces 97% of total output of rare-earth metals – giving them monopoly power in this market
  4. The proportion of a consumer's income allocated to spending on the good – products that take up a high % of income will have a more elastic demand
  5. The time period allowed following a price change – demand is more price elastic, the longer that consumers have to respond to a price change. They have more time to search for cheaper substitutes and switch their spending.
  6. Whether the good is subject to habitual consumption – consumers become less sensitive to the price of the good of they buy something out of habit (it has become the default choice).
  7. Peak and off-peak demand - demand is price inelastic at peak times and more elastic at off-peak times – this is particularly the case for transport services.
  8. The breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a price change.

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