Editing Elasticity (economics) (section)

== Determinants of elasticity ==

There are various factors that may affect elasticity, and these factors differ for the types of elasticity.

=== Factors affecting price elasticity of demand ===

==== Availability of substitutes ====
If a product has various available substitutes that exist in the market, it is likely that it would be elastic.<ref name=":3" /> If a product has a competitive product at a cheaper price in the market in which it shares many characteristics with, it is likely that consumers would deviate to the cheaper substitute. Thus, if many substitutions existed in the market, a consumer would have more choices and the elasticity of demand would be higher (elastic). In contrast, if there were few substitutions that existed in the market, consumers will have fewer choices and little to no available substitutes which means elasticity of demand would be lower (inelastic).<ref name=":3">{{cite journal|last=Ravelojaona|first=Paola|date=2019|title=On constant elasticity of substitution – Constant elasticity of transformation Directional Distance Functions|journal=European Journal of Operational Research|volume=272|issue=2|pages=780–791|doi=10.1016/j.ejor.2018.07.020| s2cid=52900747 }}</ref>

==== Product is necessity or luxury ====
If a product is a necessity to the survival or daily life of a consumer, it is likely to be inelastic.<ref>Dholakia, R.H., 2016. Demand elasticities for pulses and public policy options, London: Indian Institute of Management, Ahmedabad.
</ref> This is due to the fact that if a product is so intrinsically important to the daily life of a consumer, a change in price is not likely to affect its demand.<ref name=":1" />

==== Time elapsed since price changed ====
If the price of a product is increasing and it has little available substitutes, it is likely that the consumer will still continue to pay this higher price.<ref name=":1" /> The fact that the consumer needs the good in the short-run, means that he is likely to continue this action regardless in the long-run. This shows inelasticity of demand, because even if there is a huge increase of a product's price, there is no reduction of demand. However, if the consumer could not afford the new price of the product, they would likely have to learn to live without it, making the price elastic in the long-run.<ref name=":3" />

==== Percentage Income spent on the good ====
When the consumer spends a considerable portion of their income on goods, it shows elastic demand. This indicates that a change in the price of the goods will have a low impact on the consumer's [[Marginal propensity to consume|marginal consumption propensity]]. If the income spent by the consumer on the goods is in a small proportion of their total income which means the price elasticity of demand is low in such case.<ref>{{Cite web |title=Elasticity |url=https://corporatefinanceinstitute.com/resources/economics/elasticity/ |access-date=2023-04-20 |website=Corporate Finance Institute |language=en-US}}</ref>

Alternatively, we may also determine the factors affecting demand elasticity by considering three "Intuitive factors. Firstly, we may consider that there is different nature of elasticity when weighting a "brand" of a product or a "category" of a product, a particular brand of product is subject to elasticity as other brand may replace it, while a "category" of a product may not be easily replaced by other category of products. Secondly, like a complementary product, there are some commodities that is inelastic as buyer may have proceeding commitment to purchase it in the future, such as vehicle spare part. Thirdly, consumer mostly pay attention to product which cost a majority of share of their spending, hence any change of price in this product or services would be immediately affect consumer demand, hence this kind of product is elastic, while a product which is not part of consumer majority of purchase is inelastic due to "low involvement to products" effect.<ref>{{cite book |last1=Png |first1=Ivan |title=Managerial Economics|chapter=Elasticity|date=30 June 2012 |publisher=Routledge |isbn=978-0-203-11609-8 |page=41|edition=4th|doi=10.4324/9780203116098}}</ref>

=== Factors affecting price elasticity of supply ===

==== Availability of scarce resources in the market ====
It is one factor affecting the price elasticity of any industry if the industry uses [[scarce resources]] to produce goods. If there is an increase in demand for the goods, the company will not be able to meet the demand because of the availability of resources. Thus, it will increase the prices of the resources, leading to a corresponding increase in the price of the producer goods.<ref>{{Cite journal |last=Rustam |first=R. |date=2009 |title=Study of factors affecting demand and supply of sugar in Indonesia |url=https://www.ajol.info/index.php/jorind/article/view/50943 |journal=Journal of Research in National Development |language=en |volume=7 |issue=2 |doi=10.4314/jorind.v7i2.50943 |issn=1596-8308}}</ref> For example, Petrol is a natural resource, and thus it is scarce. If the demand for Petrol increases as there is a scarcity of Petrol, it will lead to an increase in petrol prices.

==== Number of competitors in the industry ====
It means that if the number of competitors is producing the same goods, there is an easy supply of the goods and thus supply is more inelastic with the increase in competitors.<ref>{{Cite web |last=Suman |first=Sanket |date=2015-10-16 |title=9 Factors Affecting Price Elasticity of Supply |url=https://www.economicsdiscussion.net/price-elasticity-of-supply/9-factors-affecting-price-elasticity-of-supply/12455 |access-date=2023-04-20 |website=Economics Discussion |language=en-US}}</ref>

==== Others ====
Like Price Elasticity of Demand, time also affects Price Elasticity of Supply. Though, there are other varying factors that affect this too, such as: capacity, availability of raw materials, flexibility, and the number of competitors in the market. Though, the time horizon is arguably the most influential detriment to price elasticity of supply.<ref name=":5" />

The longer the time horizon, the easier it is for commodity buyers to choose alternative products (substitutes). Further, as the time for suppliers to respond to price changes increases, a given price change will have a more significant impact on supply. However, suppliers can also hire more labour overtime, raise more funds, build more new factories to expand production capacity, and ultimately increase supply. In general, long-term supply is more elastic than short-term supply because producers need some time to adjust their ability to adapt to changes in demand.<ref>{{cite journal |first1=Leonid |last1=Galchynskyi |title=Estimation of the price elasticity of petroleum products' consumption in Ukraine |journal=Equilibrium (Toruń ) |date=2020-06-24 |volume=15 |issue=2 |pages=315–339 |doi=10.24136/eq.2020.015|doi-access=free }}</ref>