Factors Affecting Price Elasticity Of Demand Essay Scholarships

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Factors Affecting Demand and Supply of Chocolate
Chocolate is food that can be consumed raw or processed. It can be sold as powder to be used as an ingredient for making hot drinks, or produced as a solid bar for direct consumption. Every product in the market is governed by the laws of demand and supply that control the quantity produced, the quantity bought and at what price (EconPort, 2006). This way, the markets have managed to compete fairly and even the producers have known what to produce and how much to sell it. The forces of demand and supply are governed by the determinants of demand and supply respectively. The law of demand states that when the quantity of a product demanded by the consumers increases with decrease in price (BlackAcademy.net, n.d). This also means that when the price of a commodity increases, its demand in the consumer market decreases. Therefore the relationship between the price at the market and the consumer demand is inversely related.
There are several determinants of demand that determine the quantity of chocolate demanded in the market. Demand in itself is the desire to acquire a specific amount of a product when all other factors remaining constant. There are a range of factors that determine the quantity of chocolate demanded by consumers (BlackAcademy.net, n.d). The ability to buy more of chocolate by a consumer totally depends on the purchasing power of chocolate in the market. It is evident that every consumer does a lot of purchases all the time, but the quantity of a particular good, maybe chocolate, will differ according to its price, needs, and other factors.
One of the factors that determine the quantity purchased of chocolate is its price at the market. Price change of chocolate or any other commodity affects so much its quantity demanded by a consumer of even in the market in general. It should be understood that the factors affecting the quantity demanded by consumers are determined also by the consumers themselves. Every time the price of chocolate goes up, the quantity demanded by consumers decreases. On the same note, when prices of chocolate in the market reduce, consumers tend to purchase more. This is due to the feeling of spending little for the chocolate rather than other commodities. This has been seen in every market on different brands of chocolate are being bought the more than normal most especially when its prices are low (BlackAcademy.net, n.d).
The price of other related commodities also affect the quantity demanded of chocolate. For instance chocolate powder for making beverages has substitutes like coffee and tea. Moreover, chocolates bars are bought as gifts for loved ones, they can have several gifts that can act as gifts to loved ones (EconPort, 2006). This in the long run implies that shall the prices of the substitutes of chocolate decrease, then the demand for chocolate will also fall due to t...

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i. Nature of Goods:

Refers to one of the most important factors of determining the price elasticity of demand.

In economics goods are classified into three categories, namely, necessities (or essential goods), comforts, and luxuries.

Generally, the demand L essential goods, such as salt, sugar, match boxes, and soap, is relatively inelastic (less than unity) or perfectly inelastic.

This implies that consumers purchase the same quantity of these goods, regardless of increase or decrease in their prices. Moreover, the consumption of necessities cannot be postponed; therefore, the demand for necessities is inelastic. On the other hand, price elasticity of demand for luxury goods, such as car, air conditioners, and expensive jewellery, is highly elastic.

Any change in the prices of luxury goods cause a major a change in their demand. In addition, the price elasticity of demand for comforts, such as milk fan, and coolers, is equal to unity. Therefore, we can say that demand for comforts is more elastic as compared to necessities and less elastic than luxury goods. However, this statement is not always true as the demand for luxury goods may be elastic in lower and medium income groups, but can be inelastic in upper class.

Apart from this, goods are also grouped into durable and perishable goods. Durable goods, such as furniture car, and computer, are the goods that can be used number of times, while perishable goods, including eatables and cold drinks, have a single use. The price elasticity of demand for durable goods is more elastic as compared to perishable goods. The is because when the price of durable goods increases, consumers prefer to get the old ones repaired or replace them with pre-used ones.

ii. Availability of Substitutes:

Influences the elasticity of demand to a larger extent. The main reason for change in the elasticity of demand with change in price of some goods is the availability of their competing substitutes. The larger the number of close substitutes of a good available in the market, greater the elasticity for that good. For example, tea and coffee are close substitutes.

If the price of tea rises, consumers may curtail the consumption of tea and purchase coffee and versa. In such a case the demand for tea decreases, while demand for coffee increases. Therefore, the elasticity of demand for both of these goods would be higher. However, the demand for goods that do not have close substitutes, such as liquor, is inelastic, irrespective of increase or decrease in its price.

iii. Number of Uses of a Good:

Helps in determining the price elasticity of a good. The demand for multi-use goods is more elastic as compared to single-use goods. When the price of a multi-use good decreases, consumers would increase its consumption. Therefore, the percentage change in the demand for multi-use goods is more with respect to percentage change in their prices.

For example, electricity can be used for a number of purposes, such as lighting, cooking, and various commercial and industrial purposes. If the price of electricity decreases, consumers may increase its usage for various other purposes.

Similarly, if the price of milk decreases, consumers may increase its consumption by using it for various purposes, such as making curd, butter, cream, and ghee. In such a case, the demand for milk would be highly elastic. On the contrary, if the price for these goods increases, there use would be restricted to urgent purposes only.

iv. Distribution of Income:

Acts as a crucial factor in influencing the price elasticity of demand. If a consumer has high income, then the demand for products consumed by him/her would be inelastic. For example, an increase in prices of any product would not affect the demand for products consumed by a millionaire.

On the other hand, demand for products consumed by lower or middle income consumers would be highly sensitive to change in the price. For example, if the price of mobile phones increases, then the demand for mobile phones would be inelastic in high income group, whereas it would be highly elastic in lower and middle income group consumers.

v. Level of Price:

Refers to the fact that demand for high-priced goods, such as expensive gold and diamond jewellery and imported cars, is inelastic. The change in the price of these goods produces a very small change in their demand. Similarly, the demand for low-priced goods, such as cheap potatoes and match boxes, is also inelastic.

This is due to the fact that consumers have already purchased these goods in sample quantities; therefore, change in the price of these goods causes a little change in their demand. In the words of Marshall, “Elasticity of demand is great for high prices, and great or at least considerable for medium prices, but it declines as the price falls, and gradually fades away if the fall goes so far that satiety level is reached.”

Apart from this, the demand for medium-priced goods that are neither very costly nor very low cost is elastic. The demand for medium-priced goods is very sensitive to change in their prices.

vi. Proportion of Total Expenditure:

Refers to another important factor that determines the price elasticity of demand. If a consumer spends a large portion of his/her income to purchase a specific product, then the demand for that product would be elastic. On the contrary, the demand would be inelastic for products which are purchased after spending a small portion of consumers’ income.

For example, goods, such as salt, newspaper, toothpaste, matchboxes, pens, and books, entitle a small portion of consumer’s income. The demand for these goods is usually inelastic as increase in the price of these goods does not have major impact on consumer’s budget. Therefore, consumers continue to purchase the same quantity of these goods even in case of increase in their prices.

vii. Time Factor:

Implies that the price elasticity of demand largely depends on time that consumers take to adjust themselves with new prices of a product. The longer the period of time, higher the price elasticity of demand. This is due to the fact that over a period of time, consumers get adjusted to change in prices or new prices.

For example, if the price of petrol decreases, then it would not result in immediate increase in its demand until consumers have purchasing power to buy vehicles. However, over a period of time, consumers might be able to adjust their expenditure and consumption patterns, so that they can purchase vehicles spurred by fall in the prices of petrol. Therefore, we can say that fall in the price of products, would expand their demand in the long run.

viii. Complementary Goods:

Refer to the fact that the demand for complementary goods is relatively inelastic. The complementary goods, pen and ink and car and petrol, are consumed jointly. Therefore, the rise in price of one good would not affect its demand, until there is change in the price of its complementary good. For example, if the price of petrol rises, then its demand would not contract immediately until the price of car increases.

ix. Possibility of Postponement:

Implies that goods whose demand can be postponed by consumers to a near future, then the demand would be highly elastic. For example, purchasing a car and renovating a building can be postponed; therefore, their demand is highly elastic. On the other hand, if the demand for a particular product cannot be postponed, then its demand would be inelastic. For example, demand for medicines is inelastic.

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