Determinants of Price Elasticity of Demand

1. Availability of Substitutes - The availability of substitutes affects the price elasticity of demand. When close substitutes are available, consumers will shift to other products if the price of the original product increases in the market. On the other hand, if there are no substitutes, the consumers will be forced to bear the increased price and demand for the original product will remain less elastic, even on a price change. 2. Proportion of Income Spent on Purchase - Generally, the proportion of income spent on purchase of a product affects the price elasticity of demand of the product. Goods for which a relatively large proportion of income is spent are more price elastic than goods for which a relatively low proportion of income is spent. 3. Needs vs Wants - Necessities exhibit less elastic demand than wants or luxuries. That is, price increases do not reduce the demand for necessities as substantially as it reduces the demand of luxuries. 4. Time Factor - As the time factor increases, demand tends to become more elastic due to consumers getting the opportunity to respond to changing prices over a long period of time. 5. Size of Market - Generally, goods of large markets are relatively more elastic than goods of small markets, since there are more buyers and sellers in large markets in comparison to small markets.