How to classify products based on price elasticity of demand?

INTRODUCTION

Price elasticity of demand is used to measure the relation between the change in the demanded quantity of a product and a change in its price. This article talks about price elasticity of demand, after reading this article you will get to know about price elasticity of demand and factors that influence price elasticity of Demand. There are many factors that influence price elasticity of demand for e.g. nature of goods, distribution of income etc.

Formula of Price Elasticity

Generally when price increases of a product the demand of that product decreases but there are some exceptions also and because of change in price consumers can also buy substitute good. Price elasticity can be positive or negative but most of time it is negative. Positive elasticity means when price increases of a product and then demand of that product also increases. There are many luxury products whose demand is not affected by price and there are also necessity items whose demand is not affected by price for e.g. Petrol – Consumer will use petrol as much as they were using before the price changes. You can calculate the elasticity of price by using a formula which is PE=Change in Quantity demanded ÷ Change in price

The formula is quite simple that the percentage of change that has come in quantity has to be divided into the change that has come in the price.

What factors impact price elasticity?

There are many factors that affect the price elasticity for e.g. nature of goods, substitute of goods, price of product, distribution of income, postponement of product, level of price, number of uses of a good proportion of total expenditure and others. Here is the factors that influence price elasticity demand.

Nature of Goods – This is one of the strong factors which affect price elasticity. Nature of Goods classified into three categories which essential goods, comforts, and luxuries.

Essential Goods - These are products whose price does not affect the price elasticity. The consumer will consume essential goods whether prices increases or not for e.g. Petrol. The demand for essential goods are inelastic.

Comforts – These are goods whose price does affect the price elasticity for e.g. if price of if the price of an air conditioner will decrease then it demands will increase. Mostly whose income is limited they consume these products when the price decreases and when price start increases then demand decreases.

Luxury - Examples of luxury products are expensive jewelry, Car, etc. These luxury items are highly elastic. When prices of luxury goods change it does affect the elasticity of demand. The consumer will buy more gold when prices are low.

Availability of Substitute- substitute products always affect the elasticity of demand for e.g. Tea and coffee are close substitutes when prices of coffee increase consumer can buy tea because these are close substitute so when prices of coffee increase demand of tea will automatically increase.

Distribution of Income- Distribution of income does affect the price elasticity of demand because those consumers whose income is limited they will buy a product when price of that product will decreases and it will affect the elasticity of demand.

Price of Product – For e.g. many companies make toothpaste, if a company reduces the price of its toothpaste, then many consumers will buy the product, it will also affect the elasticity of demand. Price is a big factor that affects elasticity of demand.