Price Elasticity of Demand and Taxation



Price Elasticity of Demand and Taxation

a) Elasticity of the demand is the responsiveness of quantity demand to the changes in price. It may be elastic or inelastic that depends on many factors, Elasticity of demand differs from commodity to commodity. At the same time, interestingly, the elasticity of demand may be different for different persons may be different even thought the commodity is same. There are many factors of the elasticity of demand. Some of the factors are discussed below.

General Level of Price

It is seen that most of the times, it has been witnessed that demand for something that is very costly or something that is very cheap is very elastic. Goods that are high on cost are demanded by the elite class and mostly they are not at all affected by the change in the price. On the other hand, if the price of the good is relatively small, then there is a fair chance that price change won't affect the quantity demand as people are not consuming those (Formula, 2009). If price of Benz increases from $ 3 million to 3.5 million, the rich would still buy it as it does not make any difference to them. Similarly, the change in the price of salt won't really affect the quantity demand.

The Probable Substitutes

When one looks at the demand of the commodity, there is a fair chance that if there are certain substitutes for the commodity, then the demand would be elastic. The small rise in the price would lead people towards the consumption of that good (Hughes et al, 2006). The most common example in this regard is that of energy goods, such as oil, kerosene, and coal are elastic as all of them are substitutes to each other.

Time Period

Longer is the time period, the demand is more elastic. For instance, if there is an increase in the price of the petrol, then there is a fair chance that people will not immediately switch to the new commodities immediately. On the other hand, if the prices are on the higher side for a longer period of time, then there is a chance that people will switch to some of the other alternatives (Formula, 2009). Thus it can be seen that elasticity depends on the time period.

Extent of the Total Expenditure on the Product

If a small proportion of the income ...