Explain the effect of the following on Price Elasticity of Demand of a commodity, (i) Number of substitutes (ii) Nature of the commodity (All India 2010
The Correct Answer and Explanation is :
Effect on Price Elasticity of Demand
Price Elasticity of Demand (PED) measures how much the quantity demanded of a good responds to a change in its price. It is influenced by several factors, including the number of substitutes and the nature of the commodity.
1. Number of Substitutes
The availability of substitutes plays a crucial role in determining the price elasticity of demand for a commodity.
- More substitutes → More elastic demand: If a product has many close substitutes, consumers can easily switch to another product if the price rises. This makes the demand highly elastic. For example, if the price of a particular brand of toothpaste increases, consumers can switch to another brand with minimal inconvenience.
- Fewer substitutes → Less elastic demand: If a commodity has few or no substitutes, consumers have no choice but to continue purchasing it even if the price increases. This results in inelastic demand. For instance, salt has almost no substitutes, making its demand highly inelastic.
2. Nature of the Commodity
The type of commodity also significantly affects its price elasticity.
- Necessities → Inelastic demand: Essential goods such as food, water, and medicines are necessities, meaning consumers continue to buy them despite price changes. Since these are required for survival, demand remains relatively unchanged, making it inelastic.
- Luxuries → Elastic demand: Luxury goods, such as designer clothing, high-end cars, and premium smartphones, are not essential for survival. Consumers are more likely to reduce consumption if prices rise, making demand more elastic.
- Habit-forming goods → Inelastic demand: Products like tobacco and alcohol often have inelastic demand because consumers are addicted and continue purchasing them despite price hikes.
Thus, the number of substitutes and the nature of the commodity are key determinants of how sensitive consumers are to price changes.
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