(a) Five causes of Elasticity of demand:
1. Nature of the commodity: An important determinant of Elasticity of demand for a commodity is the nature of the commodity itself. If the commodity is a necessity of life, its demand will not change much when its price changes. The Elasticity of demand will be low. In our country the demands for rice, salt, edible oil, etc., are relatively inelastic.
2. Multiple uses: The demand for a commodity, which can be put to a variety of uses, will be relatively elastic demand for instance, electricity can be used for cooking, heating, lighting, washing etc. When the price of services rises, the consumers can cut down on some of the uses of electricity, confining themselves to the more urgent uses. The demand for electricity will, therefore, be elastic.
3. Role of habits: Habits also play a role in the determination of elasticities For instance, if a person has developed the habits of smoking, he may not be able to reduce his consumption of cigarettes even when the price of cigarettes’ goes up. His demand for cigarettes will be inelastic.
4. Durability of the goods: In case of a durable goods (for instance, a piece of furniture), a change in price would not affect demand very much. Because most of the consumers will not buy a new piece of furniture until the old one is totally worn out. For this reason, durable goods usually have low elasticities of demand.
5. Availability of substitutes: The commodities, for which other substitutes are available in the market, have more elastic demands as compared to commodities without proper substitutes. A good example is that of tea, for which coffee is generally available as a substitute. A change in the price of tea, causes almost proportional change in its demand.
(b) Five determinants of shift in the supply curves:
1. Change in price of inputs: The supply of a commodity is also affected by change in price of inputs used in the production of good. If the price of inputs (Wages of labour, prices of raw materials and fuel) goes up, the gross cost of production will rise and as a result the supply of the commodity decreases. On the other hand, if the price of inputs declines, unit cost of production declines and as a result the supply of the commodity increases.
2. Change in Technology: The supply of a commodity depends on the production technology used by the firm. If there is an improvement in the production technology used by the firm, the cost of production declines. Lower cost of production increases the supply of a commodity. The use of obsolete technology raises the cost of production and consequently supply of a commodity decreases.
3. Change in Goals of Hie firm: The supply of a commodity also depends upon the goals of firms. Their goals may be profit maximization or sales maximisation. If their goal is to maximise profits, more quantity will be supplied only at high price. But if the firms want to maximise their sales more quantity will be supplied even at the same price. Thus, change in the goals of the producers also influences the supply.
4. Change in Government policy: The Government policy also affects the supply of a commodify. If there is an increase in excise duties and heavy taxes are imposed, the producers will be discouraged and the supply will decrease.
5. Number of Producers: If no. of firms producing a particular commodity increases market supply of the commodity will increase. When the existing firms of an industry are making huge profits, the new firms may enter the industry and the total production and supply will, thus, increase. On the other hand, in the event of losses, some firms of the industry start leaving it, the supply of the product will decline.