Question

Define Price Elasticity of Demand and explain any three factors that affect it.

Hint:

Elasticity memory trick: “SNP”

• S = Substitutes
• N = Nature (luxury vs necessity)
• P = Proportion of income

More substitutes or luxury nature $\Rightarrow$ more elastic demand.

Answer 1

Concept: Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded of a good to a change in its price.
Definition: \[ \text{Price Elasticity of Demand} = \frac{%\ \text{Change in Quantity Demanded}}{%\ \text{Change in Price}} \] It shows how sensitive consumers are to price changes. 
Types (based on value):

• Elastic demand $(>1)$
• Inelastic demand $(<1)$
• Unit elastic $(=1)$

Factors Affecting Price Elasticity of Demand: 
1. Availability of Substitutes:

• More substitutes $\Rightarrow$ more elastic demand.
• Fewer substitutes $\Rightarrow$ inelastic demand.

{Example:} Tea and coffee. 
2. Nature of the Commodity:

• Necessities $\Rightarrow$ inelastic demand (e.g., salt, medicines).
• Luxuries $\Rightarrow$ elastic demand (e.g., cars, ACs).

3. Proportion of Income Spent:

• Goods taking large share of income $\Rightarrow$ elastic demand.
• Small expenditure goods $\Rightarrow$ inelastic demand.

{Example:} Cars vs matchboxes. 
Other Factors (brief):

• Time period
• Habits and preferences
• Brand loyalty