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What influences price elasticity of demand.
There are two factors that influence elasticity of demand, Theory of demand and supply. For instance, when the price of a product is high the demand is low and vice versa. As far as demand is concern, there are complimentary goods and supplementary. Complimentary goods are used together for instance, pen and ink or chalk and blackboard (Linderman, 2001). The supplementary goods are goods that can be interchanged for example charcoal and gas. When the price of one complimentary good is high, the demand for the other complimentary product decreases. If the price of pen is high, its demand decreases causing a decrease in demand for ink. In supplementary good for instance, if the price of charcoal increases, its demand decreases causing consumers to opt for a substitute good such as gas, thus leading to its demand increase.
In theory of supply, when the supply of a commodity is high, the price increases. This is because, the supplier will want to gain more profit from the high prices.
Factors that contribute to the elasticity of demand for goods
There are many factors that contribute to demand for price elasticity. The first factor includes availability of substitutes. In general, the more the substitute there is, the more elastic the demand. For instance, if the price of a cup of tea rises by $0.25, consumers would substitute their morning caffeine with a cup of coffee. However, if the cost of caffeine was to increase as a whole, there would be little change in the consumption because they would be fewer substitutes. Many will not be willing to give up what they use despite of a price increase (Mankiw, 2008).
Secondly, amount of income available to spend on the good can affect demand elasticity. For instance, if the price for coke increases from $ 1 to $ 2 and income remain the same, the income that was to spend for two cokes will only be spent on one coke. Therefore, the consumer will be forced to reduce his demand for coke and vice versa.
Discuss how these factors influence consumers to purchase goods or services.
Availability of substitute leads to consumers having an option for supplementary product. For instance, if the price for coca cola rises within the market, consumers will switch to purchasing Pepsi cola that is its substitute. In addition to this, if an income earning of an individual increases the demand for purchasing the good or services increases. For instance, if the price for purchasing cars increases and there is no increase in income earning, salary decreases, the demand for purchasing car would decrease.
How price elasticity of demand relates to microeconomics
When the price of a product is high, consumers will opt for a supplementary good. This implies that, if an individual is spending $10 dollars on kales and the price increases to $15 dollars, the individual will opt to use cabbage which in this case may be cheaper. In addition, an increase in income will cause an increase in demand of goods and services because the consumer’s purchasing power will increase while a decrease in income will cause a decrease in purchasing power of an individual.
If the quantity supplied is expected to decrease in future, an individual will demand more of the product now, this spending more on that good. On the other hand, if the quantity of supply of a commodity is expected to increase in future, the demand for buying the good decreases. For example, if the supply of maize is predicted to increase in future, many consumers will prefer buying the product when it is accessible due to the fact that the price will be low .Change in taste and fashion may also affect an individual on how much he/she spends. If a product is in fashion, its taste will improve causing individuals demand on the product to increase.
A real-life example that shows elasticity of demand
In Kenya, the price of kerosene increased tremendously last year. As a result, many could not afford kerosene which was too expensive. This contributed to decrease in its demand for many opted to use charcoal as a substitute
Elastic, inelastic and unitary elastic.
An elastic good is a product that has elastic demand thus consumers have an option of choosing a substitute. If the price for gas is high its demand decreases and consumers can substitute with charcoal. An inelastic good has a constant demand despite of its increase in price. An example is life saving drugs that people will pay any cost to save a life. On the other hand, unitary elastic is a product with unitary elastic demand is a product in which its increase in price causes its demand to decrease. For instance, if the price for cars increases by 20% many consumers will decrease the demand for buying the car (Depken, 2005).
References
Depken, C. A. (2005). Microeconomics demystified. New York. McGraw-Hill Professional
Mankiw, G. N. (2008). Principles of Microeconomics. New York. Cengage learning publishers
Linderman, B.J. (2001). EZ-101 Microeconomics. New York. Barron’s Educational Series
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