Manag., July-2018 – Q1 Multiple Choice Questions

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Option : C
Explanation : The following are the main factors which determine the price elasticity of demand for a commodity:
(i) The Availability of Substitutes: If for a commodity close substitutes are available, its demand tends to be elastic. If the price of such a commodity goes up, the people will shift to its close substitutes and as a result, the demand for that commodity will greatly decline. The greater the possibility of substitution, the greater the price elasticity of demand for it. If for a commodity substitutes are not available, people will have to buy it even when its price rises, and therefore its demand would tend to be inelastic.
(ii) The Proportion of Consumer’s Income Spent: The greater the proportion of income spent on a commodity, the greater will be generally its elasticity of demand, and vice versa. The demand for common salt, soap, matches, and such other goods tend to be highly inelastic because the households spend only a fraction of their income on each of them. When the price of such a commodity rises, it will not make much difference in consumers’ budget and therefore they will continue to buy almost the same quantity of that commodity and, therefore, the demand for them will be inelastic.
(iii) The Number of Uses of a Commodity: The greater the number of uses to which a commodity can be put, the greater will be its price elasticity of demand. If the price of a commodity having several uses is very high, its demand will be small and it will be put to the most important uses and if the price of such a commodity falls it will be put to less important uses also and consequently, its quantity demanded will rise significantly. To illustrate, milk has several uses. If its price rises to a very high level, it will be used only for essential purposes such as feeding the children and sick persons. If the price of milk falls, it would be devoted to other uses such as preparation of curd, cream, ghee, and sweets. Therefore, the demand for milk tends to be elastic.
(iv) Complementarity between Goods: Complementarity between goods or joint demand for goods also affects the price elasticity of demand. Households are generally less sensitive to the changes in the price of goods that are complementary with each other or which are jointly used as compared to those goods which have independent demand or used alone. For example, for the running of automobiles, besides petrol, lubricating oil is also used. Now, if the price of lubricating oil goes up, it will mean a very small increase in the total cost of running the automobile, since the use of oil is much less as compared to other things such as petrol. Thus, the demand for lubricating oil tends to be inelastic.
(v) Time and Elasticity: The element of time also influences the elasticity of demand for a commodity. Demand tends to be more elastic if the time involved is long. This is because consumers can substitute goods in the long run. In the short run, the substitution of one commodity by another is not so easy. The longer the period of time, the greater is the ease with which both consumers and businessmen can substitute one commodity for another.