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The law of demand shows the direction of the change in quantity demanded due to change in its price. The concept of elasticity of demand refers to the degree of responsiveness of quantity demanded of a good to a change in its price, income or prices of related goods.

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FACTORS INFLUENCING THE ELASTICITY OF DEMAND

1. Price Level:  The demand of goods having very high prices or very low prices are less elastic, and goods of medium level prices have more elastic demand. 2. Income:  Elasticity of demand will be less in the case of consumers having either a very high income or very low income. But the elasticity of demand will be more elastic of the consumers of middle-income group. 3. Substitute goods:  One of the most important determinants of elasticity is degree of availability of close substitutes. The demand for commodities having large substitutes will be more elastic than the commodities having small number of substitutes.

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4. Complementary Goods:  The rise or fall of price of a good affects always the demand of its complementary goods. So, the demand of the complementary goods is always elastic. 5. Proportion of Expenditure:  Elasticity will be less about those goods on which consumer spends a very small fraction of his total expenditure. On the other hand, elasticity will be greater regarding those goods on which consumers spends a large portion of his total expenditure.   6. Nature of the Commodity:  Commodities are broadly divided into two groups – necessities and luxuries. Necessities have highly inelastic demand while luxuries have highly elastic demand.

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7. Distribution of Wealth:  The demand of most of the commodities will be less elastic when the distribution of income and wealth is unequal in the society. If this distribution is equal, the demand becomes more elastic. 8. Durability:  Perishable goods have less elastic demand while the durable goods have more elastic demand.   6. Addiction:  when a product is habit forming such as cigarettes, demand will be inelastic.

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1. Wage Bargaining:  The capacity of trade unions to raise wages depends on the elasticity of demand for the product. If wages are permitted to rise, costs and prices will also rise. If demand is inelastic, sales will not fall much. Again, if demand is elastic, sales will fall. 2. Bumper Crops:  The demand for most agricultural commodities is highly elastic. An increase in the output of wheat or jute due to good harvest may lead to a sharp fall in their prices. This will lead to a fall in the revenue of the farmers. So, to help the farmer the government will have to impose restriction on agricultural output.

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3. Wage Bargaining:  The government considers the elasticity at the time of selecting goods and services upon which to impose excise duty. 4. Pricing Policy:  The concept of price elasticity has great practical relevance for business pricing policy. Whenever a firm considers to change the price of its product, it must consider the effect of the proposed price change on consumers spending. To the monopolist, the concept has great importance as it helps him to regulate his production and fix his price. 5. Theory of Distribution:  In the field of distribution, the concept of elasticity of demand is useful in the determination of factor prices. The factors having inelastic demand can earn higher remuneration while the factors having more elastic demand would get lower remuneration.

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6. International Trade:  If the demand for exports of a country is inelastic, the trader will be gainer in the international trade by raising the price of his product. Again, when the demand for exports is more elastic, the trader can sell more by reducing the price of his product if it is permissible.