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Chapter: Civil : Engineering Economics and Cost analysis : Demand and Schedule

The Factors Determing Price Elasticity of Demand

i. Necessaries and conventional necessaries ii. Demand for luxuries is elastic iii. Proportion of total expenditure iv. Substitutes v. Goods having several uses vi. Joint demand vii.Goods the use of which can be postponed viii.Level of prices ix. Market imperfections x. Technological factors xi. Time period



i.  Necessaries and conventional necessaries:  people buy fixed quantities of such commodity whatever is the price. The change in the price o f wheat ma y be immaterial for upp er classes, but its consumption will certainly increase among the poor when the price falls. It ma y be noted that demand for a necessity life as a whole ma y be inelastic, b ut in a competitive market, demand for the output of any particular firm is highly elastic. If it raises the price a bit, it may lose the entire market.


ii. Demand for luxuries is elastic: It stands to reason that lowering of the price of things like radio will lead to more bring bought i.e. the demand is elastic. Thus for the same article the demand ma y be elastic for some people and inelastic for others elastic in one country and inelastic in another and elastic at one time and inelastic at another.


iii. Proportion of total expenditure: It a consumption good absorbs only a small proportion of total expenditure, eg, salt the demand will not be much affected b y a change in p rice hence, it will be inelastic.

iv. Substitutes: The main cause of difference in the responsiveness of the demand for that there


are more completing substitutes for some goods thanforothers?.When the price of tearises, we may curtail its purchase and take of coffee, and vice versa. In a case like this a change in price will lead to expansion or contraction in demand.


v.  Goods having several uses: Coal is such a commodity when it will be used  for several purposes e. g, cooking heating and industrial purposes; and its demand will increase. But , when the price goes up, it use will be restricted only to very urgent uses and consequently less will be purchased when the prices rises the demand will thus contract when wheat becomes very cheap it can be used even as cattle feed hence demand for a commodity having several uses is elastic


vi. Joint demand: If for instance, carriages beco me cheap but the prices of horses continue to rule high, demand for carriage will not extend much. In other words the demand for jointly demanded goods is less elastic.


vii.Goods the use of which can be postponed: Most of us during the war postponed our purchases where we co uld e.g. building a house, buying furniture or having a number of warm suits. We go in for such things in a large measure when the y are cheap demand for such goods is elastic.

viii.Level of prices: If a thing is either very e xperience or very cheap, the demand will be in elastic. If the price is too high, a fall in it will not increase the demand much. If on the other hand , it is too low, people will have alread y purchased as much as they wanted: any further fall will not increase the demand.


ix. Market imperfections: Owing to ignorance about market trends the demand for a good may not increase hen its price falls for the simple reasons that consumers ma y not be aware o f the fall in price.


x. Technological factors: Low price elasticity ma y be due o some technical reasons. For example lowering of elasticity ma y be electricity rates ma y not increase co nsumption because the consumers are unable to buy the necessary electric appliances.


xi. Time period: The elasticity of demand is greater in the long run than in the short run for the simple reasons that the consumer has more time to make adjustment in his scheme of consumption. In other word he is able to increase or decrease his demand for a commodity


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Civil : Engineering Economics and Cost analysis : Demand and Schedule : The Factors Determing Price Elasticity of Demand |

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