Demand elasticity is the sensitivity of the demand for a good or service due to a change in another factor. There are many factors that influence a change in demand elasticity. These factors include price, income level and availability of substitutes.
One factor that can affect demand elasticity of a good or service is its price level. For example, the change in the price level for a luxury car can cause a substantial change in the quantity demanded. If the luxury car maker has a surplus of cars, it may decrease prices to increase the quantity demanded, and therefore reduce inventory and increase the company's total revenue.
Also know as the income effect, the income level of a population also influences the demand elasticity of a good or service. For example, suppose an economy is facing a downturn and many workers are laid off. The shift in the income level of the majority of a population causes luxury items to be more elastic. Suppose there is a decrease in the average income level of an entire economy; luxury items such as luxury cars and flat-screen televisions experience a high elasticity of demand. Many people opt to save money rather than splurge on luxury items during an economic downturn.
If there is a readily available substitute for a good or service, the substitute affects the elasticity of demand of that good or service. The availability of a substitute makes demand for a good or service sensitive to price changes. For example, suppose the price level of Florida oranges increases due to a cold front that passes through the state. A close substitute for Florida oranges is California oranges. A rise in the price of Florida oranges encourages consumers to buy California oranges. (For related reading, see: Elasticity of Demand.)