This is an educational blog on Demand and its various features homework answers. The following blog would help you to understand better what is demand, what are the different factors that affect demand for a commodity, what are the different types of elasticity of demand and what are the factors that affect the elasticity of demand.
Often student faces a difficulty in differentiating between the factors affecting demand and factors affecting the price elasticity of demand. Thus through this Demand and its various features homework answers, we tried to explain the difference between the two.
What is demand?Â Â Â Â Â Â Â
Demand for a commodity refers to the amount of the commodity that the consumers are willing to buy at a given price. In this blog, we are going to talk about Demand and its various features homework answers. This blog would help you to understand better what is meant by demand and what are the different factors that affect the demand for a commodity.
What are the factors affecting the demand for a commodity?
The demand for a commodity depends on various factors. There are innumerable factors that affect the demand for the commodity. Here are some of the most important factors:
- Own price of the commodity–
There is an inverse relationship between the price of a commodity and the demand for that commodity. With an increase in the price of the commodity the demand for the commodity falls and with a decrease in the price of the commodity the demand for the commodity rises.
- Price of the other commodity–
Commodities can be classified into two types- substitutes and complements. Substitutes, as the name suggests are those commodities that are purchased in place of the other. As the price of the substitute goods increases the demand for that commodity also increases and as the price of the substitute falls the demand for the commodity falls as people switch over to another commodity. A common example of substitute commodities is tea and coffee.
Demandof the commodity also depends on the complements. Complements are those goods that are used together. For example pen and ink. With an increase in the price of one the demand for the other falls and with a decrease in prices of one the demand for other increases.
- Taste and preference–
The demand of a commodity also depends on the taste and preference of the consumers. As the taste and preference change the demand also changes.
- Income of the consumers–
Another determent of the demand is change in the income of the consumers. The commodities can be classified into three types with respect to the change in income. Normal goods are those the demand for which rises with a rise in the income of the consumers and vice-versa.
Inferior goods are those goods the demand for which falls with a rise in the income and vice-versa. Inexpensive goods are those goods the demand for which remains constant with any change in the income.
- Consumerâ€™s expectation regarding future price–
The demand of the commodity also changes with the expectation of the consumers regarding the future price. If the consumers anticipate a rise in price in the near future, then demand for that commodity will rise. If they anticipate a fall in the demand, then they will suspend their current consumption and as a result, demand will fall.
- Nature of the goods-
The demand for the goods is different depending on the nature of the commodity. If it is a basic commodity, then the demand doesnâ€™t fluctuate that much, but if it is a luxury then the demand would fluctuate.
Elasticity of demand
Demand for a good is said to be elastic if the quantity demanded responds substantially to the change in the price. Whereas the demand for a commodity is said to be inelastic if the quantity demanded responds only slightly to change in the price.
Therefore in short elasticity of demand refers to the degree of responsiveness of the quantity demanded due to change in the factors. There are four types of elasticity of demand that you can get an idea from Demand and its various features homework answers.
- Perfectly inelastic demand curve
- Perfectly elastic demand curve
- Unitary elastic demand curve
- Inelastic demand curve
- Elastic demand curve
One thing to note is that the flatter the demand curve the higher is the elasticity of demand and the steeper is the demand curve, the more it is on the inelastic side.
Â The elasticity of demand can be of three types:
- Price elasticity of demand– It refers to the percentage change in the quantity demanded due to the percentage change in the own price.
Therefor the formula can be written as: %change in quantity demanded/%change in the price.
- Income elasticity of demand – It refers to the percentage change in the quantity demanded due to percentage change in the income.
The formula for income elasticity of demand can be written as: %change in quantity demanded/ %change in the income of the consumers.
- Cross price refers to the percentage change in the quantity demanded due to percentage change in the price of the other commodity.
The formula of cross price elasticity is: %change in the quantity demanded/ %change in the price of the other commodity. Cross price elasticity can be zero if the two commodities are not related.
Factors affecting the price elasticity of demand.
There are several factors that affect the price elasticity of demand. Here we are going to jot down some for demand and its various features homework answers:
- Availability of close substitute:
Demand of a commodity is more elastic if the goods have close substitute. In this case,consumer can easily switch from one commodity to other if the price of one commodity increases or decreases.
- Necessities and luxuries–
Goods that are necessity have inelastic demand because, with a change in price, people canâ€™t easily stop using that product. On the other hand,luxury goods have elastic demand as the consumers can change or rather postpone the demand for such goods if the price changes.
- Time period–
Lastly, elasticity on demand depends on the time horizon. Goods often tend to be more elastic over longerperiod of time as people discovers new substitutes for those goods. But in short run it is inelastic.
- Market and elasticity of demand–
Markets are general of two types â€“ narrowly defined and broadly defined markets. In case of narrowly defined markets, there are number of substitutes available, and hence narrowly defined market has elastic demand. On the other hand, broadly defined market has inelastic demand as there are no close substitutes. For example, if we say Puma, Then it is narrowly defined market as it is a brand and it does have close substitutes. But if we say shoe market then it is a broadly defined market, and it doesnâ€™t have any close substitute. We cannot use something else in place of shoe. But we can definitely use some other brands.
Elasticity of demand and total revenue
The total revenue is calculated by the multiplying the price with the quantity (PXQ). The total revenue that is earned depends on the elasticity of demand. Total revenue is nothing but the amount paid by the buyer that is received by the seller of the commodity. If the demand for a commodity is inelastic, then the increase in the price result in a greater increase in the total revenue. It is because it is difficult to switch over to other commodities if the commodities have inelastic demand.
On the contrary, commodities which have elastic demand generate less total revenue with an increase in price. It is so because as the price of commodity increases people tend to switch over to other substitute goods whose cost is lower.