Friday, 19 October 2012

Elasticity Of Demand : Types & Factors Influence

 The three types of Elasticity of Demand are:
    i. Price Elasticity of Demand
   ii. Income Elasticity of Demand
  iii. Cross Elasticity of Demand

Three factors that influence the Elasticity of Demand are:

   i.The amount of income spent. According to, It refers to the total a person can spend on a particular good or services. If there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand. For example, if the price of a cup of tea raises from RM 1 to RM 2 per cup, while the income of the consumer remain the same, and the income available to spend on tea is RM 3, is now enough for only 1 cup of tea, instead of 3 cups of teat at RM 1 each before.

 ii. The availability of substitute goods. The concept is when one good has more substitutes, the more elastic demand will be. Vice versa, when one good is lack of substitutes, it is called an elastic product. Example of elastic goods are rice, there are variety of rice in the market that the consumer can choose from, not able to buy the Basmathi, may be one can consider to buy the subsidize local rice. Inelastic goods are like unique goods, antiques, rare item like gold and titanium and so on.

Habit. It simply refers to the habit of the consumer and one's demand on certain good. For example, a habitual smoker has more demand in cigarettes, regardless of the price of the cigarettes,habitual smoker would still buy the cigarettes. The demand for cigarettes is inelastic. While non regular smoker, has less demand in cigarettes, when the price of cigarettes fall, the demand of cigarettes may be increase, and when the price raises, the demand would also decrease respectively. The demand for cigarettes is elastic.

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