Question

Choose a product that you consume. What are the determinants of the demand for your chosen product? What are the substitutes for the product? What are the complements of the product? Is the price elasticity of demand of the product elastic or inelastic? What are the determinants of the price elasticity of demand for the product? How would you characterize the income elasticity of demand of the product?

Answer 1

Let the chosen product be TEA.

The demand for good is an inverse relationship between price and quantity. The graphical relationship between price and quantity demanded is depicted by the demand curve. Any point on the demand curve shows the quantity consumer demands for any particular price.

The demand for good depends on various factors such as; own price, price of related goods, income, test and preference of the consumer. Among these factors the change in the price of the good changes the quantity demanded and represents the good for movement along the demand curve. The changes in other factors change the demand for each price and represent the shift in demand curve.

In this case, The demand for tea depends on the price of tea, price of coffee - a substitute, price of sugar/ milk - complements, and weather that changes the taste and preference of the consumer as in cold wether general consumer prefers coffee to tea.

The common substitute of tea: Coffee

The common complements of tea: Milk/ Sugar

The elasticity of demand measures the price responsiveness of demand. It measures the percentage change in quantity demanded due to percentage change in price. The price elasticity of demand depends on many things; such as:

• If the good is a necessary item, then it will have a greater elasticity of demand than a luxury item.
• If there are good substitute available for the good in the market the price elasticity of the good will increase and a relatively smaller change in price will have greater impact on the quantity demanded of the good.
• If the consumer spends a larger part of the income on the good, it will have a larger elasticity of demand.
• If there is more time available to the consumer to respond to the price change, the elasticity will tend to rise over the period and vice versa.

Tea is a common beverage and is a necessary item to many, tea has a close substitute and consumer does not spend larger part of their income on tea. Hence, tea has elastic demand or the price elasticity of demand for tea is elastic.

The income elasticity of demand is responsiveness of demand to the income of the consumer. It measures the percentage change in quantity demanded due to percentage change in income. As tea is a common beverage and not a luxury good it is normal good and hence has positive income elasticity of demand.