Determinants of demand elasticity

1. The three demand elasticities each depend on identifiable characteristics of the good rather than on chance.
2. For PED, the availability of close substitutes is usually the most important factor.
3. YED and XED depend mainly on the type of good and on how goods are related to each other.

Factors affecting PED

1. Availability of substitutes
   1. Many close substitutes make demand more elastic, because buyers can easily switch away after a price rise: if Pepsi dearer, buyers move to Coke. Salt, by contrast, has no close substitute, so its demand is highly inelastic.
2. Necessity or luxury
   1. Necessities such as bread and household electricity tend to be inelastic because buyers keep buying them whatever the price, while luxuries such as a cruise are more elastic because buyers can go without.
3. Proportion of income
   1. Goods taking a large share of income, such as a car or a foreign holiday, tend to have more elastic demand because a price rise is felt keenly in the budget, whereas a box of matches or salt takes so little that buyers barely react.
4. Addiction, habit or branding
   1. These make demand more inelastic, because buyers are reluctant or unwilling to switch away: cigarettes are addictive and strong brand loyalty (for example to a favourite trainer) locks buyers in, which is why a tax on cigarettes raises revenue rather than cutting sales much.
5. Time period
   1. Demand becomes more elastic over time, as buyers find and adopt alternatives: after a petrol price rise, drivers can only cut back a little at first, but over years they buy fuel-efficient or electric cars.
6. Breadth of definition
   1. A narrowly defined good such as one brand of crisps is more elastic than a broad category such as food in general, because the narrow good has many substitutes but the broad category has few.

Factors affecting YED

1. Whether the good is normal or inferior
   1. This fixes the sign of YED: positive for normal goods such as restaurant meals, negative for inferior goods such as supermarket value-range food.
2. Necessity or luxury
   1. Necessities such as bread have a YED between 0 and 1, while luxuries such as a sports car have a YED above 1, so luxury demand swings hardest over the economic cycle.
3. The level of income itself
   1. A good can be a luxury at low incomes and become a necessity as income rises: a car or a mobile phone was once a luxury but is now a necessity for many households.

Factors affecting XED

1. Closeness of substitutes
   1. The closer two goods are as substitutes, the larger the positive XED: Coca-Cola and Pepsi have a high positive XED, while tea and coffee have a smaller one.
2. Strength of complementarity
   1. The more strongly two goods are used together, the larger the negative XED: printers and ink cartridges, or cars and petrol, have a strong negative XED.
3. Whether the goods are related at all
   1. Unrelated goods, such as salt and cars, have an XED at or near 0.

Which factor dominates

1. The availability of close substitutes is usually the strongest influence on PED, because it decides how easily buyers can escape a price rise.
2. The time period matters greatly too, since elasticity rises as substitutes appear.
3. The factors can pull in different directions, so it depends on the specific good which one dominates.

Can we predict a good's elasticity of demand in advance?

1. To a large extent yes, because the named determinants give a systematic guide: a good with many close substitutes that also takes a large share of income, such as one brand of car, will be price-elastic, while a necessity with no close substitute, such as salt, will be inelastic.
2. But the determinants often pull in opposite directions, so the prediction is rarely clear-cut: petrol has few substitutes, which points to inelastic demand, yet it takes a large share of a motorist's budget, which points to elastic demand, and only the net effect, judged case by case, settles the outcome.
3. A good's elasticity is also not fixed: it rises as the time period lengthens and buyers find alternatives, it shifts as rising average incomes turn a luxury into a necessity, and it depends on how narrowly the good is defined, so any single figure can date quickly.
4. On balance, the determinants make elasticity broadly predictable in direction but not precisely in size, so it depends on the specific good and time horizon: the reliable approach is to identify the dominant factor for that good rather than to label it simply elastic or inelastic.