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# Determinants Of Price Elasticity Of Demand And Supply Pdf

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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. He has over twenty years experience as Head of Economics at leading schools.

Unit 3.

## 6.1: Price Elasticity of Demand

Demand drives economic growth. Businesses want to increase demand so they can improve profits. Governments and central banks boost demand to end recessions. They slow it during the expansion phase of the business cycle to combat inflation. If you offer any paid services, then you are trying to raise demand for them. So what drives demand? In the real world, a potentially infinite number of factors impact each consumer's decision to buy something.

## Determinants of Price Elasticity of Supply

The price elasticity of supply is the measure of the responsiveness in quantity supplied to a change in price for a specific good. In economics, elasticity is a summary measure of how the supply or demand of a particular good is influenced by changes in price. Elasticity is defined as a proportionate change in one variable over the proportionate change in another variable:. There are numerous factors that directly impact the elasticity of supply for a good including stock, time period, availability of substitutes, and spare capacity. The state of these factors for a particular good will determine if the price elasticity of supply is elastic or inelastic in regards to a change in price. Inelastic goods are often described as necessities.

Like price elasticity of demand, price elasticity of supply is also dependent on many factors. Some of these factors are within the control of the organization whereas others may be beyond their control. Regardless of the control, if the management has knowledge about these factors, it can manage its supply better. Here is a list of determinants which generally affect the price elasticity of supply in the market:. Capacity Addition: The theoretical model stated in the law of supply simply assumes that supply will be able to adjust up and down as and when the price changes. In doing so, the law of supply ignores the ground realities that are related with supply. Consider for instance the fact that most manufactured goods today are mass produced in massive factories and most of these factories are working to their optimum levels.

The following are the main factors which determine the price elasticity of demand for a commodity: 1. The Availability of Substitutes 2. The Proportion of.

## How does price elasticity change in relation to supply and demand?

More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand are held constant. The law of demand states that there is an inverse relationship between price and demand for a good. As a result, the PED coefficient is almost always negative. However, economists tend to ignore the sign in everyday use. Only goods that do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED.

The following are the main factors which determine the price elasticity of demand for a commodity: 1. The Availability of Substitutes 2. The Number of Uses of a Commodity 4.

### Factors Affecting Price Elasticity of Demand

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Setting the right price for your product or service is hard. One of the critical elements of pricing is understanding what economists call price elasticity. But the phenomenon is more quantifiable than that, and price elasticity shows exactly how responsive customer demand is for a product based on its price. Take for example, beef. When the price dramatically increases, demand may go way down because people can easily substitute chicken or pork. Products and services can be:.

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