Likewise, demand for common salt is inelastic because good substitutes for common salt are not available. To make it favorable, a country always desires to make the demand for its products inelastic in the international market which will allow it to raise the price and boost its exports. The elasticity of demand for the product produced: A rise in wages increases costs of production which, in turn, raise the price of the product. An employer may have to raise the wage rate quite significantly to attract more workers and encourage the workers employed in other occupations to switch jobs. It's also the case that a decrease in the price of one of the goods will decrease demand for the substitute good.
The proportion of labour costs in total costs: If labour costs form a large proportion of total costs, a change in wages would have a significant impact on costs and hence demand would be elastic. A low-priced good has less price elasticity because the price is such a small percentage of a consumer's income. Income elasticity of demand is high when the demand for a commodity rises more than proportionate to the increase in income. Drinking and smoking are the habits of a consumer, fashion is observed by those consumers who want to keep in style, while custom is a part of traditions e. This also affects demand since it regulates how much people can spend in general.
As mentioned before, If a change the price leads to a large fluctuation in demand. This causes demand for the product to contract and demand for labour to fall. Meaning that if there is a small increase in the price of beef, quantity demanded it goes down with other things remaining the same and quantity demanded mutton will go up as it is a substitute for beef. We would say, therefore, that caffeine is an inelastic product. On the other hand, an increase in price of a good or service that is far less of a necessity will deter consumers because the opportunity cost of buying the product will become too high. Examples of these products are furniture, meals at restaurants etc.
Over the long-run, the consumption patterns of the people may change with changes in income with the result that a luxury today may become a necessity after the lapse of a few years. If the frequency is greater, income elasticity will be high because there will be a general tendency to buy comforts and luxuries. As an example, consider what some consider a luxury good: vacation travel. Elasticity in this case would be greater than or equal to one. However, as more time passes, consumers adjust their purchasing behavior. Elasticity in this case would be greater than or equal to one. For complements, an increase in the price of one of the goods will decrease demand for the complementary good.
The good in question is inelastic with regard to supply. Perishable goods do not offer consumers the option of using older goods. If there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand: demand will be sensitive to a change in price if there is no change in income. The time period: As with demand, supply of labour tends to become more elastic over time. But, given sufficient time, people will make adjustments and use coal or cooking gas instead of the fuel oil whose price has risen. In the case of inelastic demand, the price of these products may be quite high because these goods are necessities to the consumer.
For example, designer label clothing or accessories or luxury car brands signal status and prestige. For example, if the price of Coke rises, people may readily switch over to Pepsi. Demand for products that are considered necessities is less sensitive to price changes because consumers will still continue buying these products despite price increases. The longer the period of time, the greater is the case with which both consumers and businessmen can substitute on commodity for another. Likewise, when the business firms find that the price of a certain material has risen, then it may not be possible for them to substitute that material by some other relatively cheaper one. The determinants of price elasticity of demand are the availability of substitutes, size, durability and time.
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 decline. For instance, a large increase in the wage paid to brain surgeons will not have much effect on the supply of labour. The demand for common salt is inelastic also because people spend very little part of their income on it and even if its price rises it makes only negligible difference in their budget allocation for the salt. The three factors mentioned above may reinforce each other in determining the elasticity of demand for a commodity or they may operate against each other. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life, or if there are good. The level of employment: If most workers are employed already, the supply of labour to any particular occupation is likely to be inelastic. Whereas commodities that are elastic.
These types of goods are referred to as. Luxury items usually have higher income elasticity because when people have a higher income, they don't have to forfeit as much to buy these luxury items. Thus, the demand for Campa Cola is elastic. But this grouping of commodities depends upon the income level of a country. The more elastic the demand for the product is, the greater the fall in demand for it and hence for workers — making demand for labour elastic.
Take the case of furniture or electrical appliances; as the prices of these products go up. To illustrate, milk has several uses. If the price of milk falls, it would be devoted to other uses such as preparation of curd, cream, ghee and sweets. With some goods and services, we may actually notice a decrease in demand as income increases. These goods tend to be things that are more of a necessity to the consumer in his or her daily life, such as gasoline. Time The third influential factor is time.
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 less as compared to other things such as petrol. The elasticity of supply works similarly to that of demand. It's probably not surprising that an increase in the price of Coke would increase the demand for Pepsi as some consumers switch over from Coke to Pepsi. If the price of common salt rises slightly the people would consume almost the same quantity of salt as before since good substitutes are not available. The elasticity of demand for a commodity will be the net result of all the forces working on it. For substitutes, an increase in the price of one of the goods will increase demand for the substitute good.