Question

which do you think come first - supply or demand for a new product? Explain your choice with an example. Identify ONE necessity item (something you cannot live without), and ONE luxuryitem (something you can live without). How does the elasticity concept apply to these two items? Do explain. Provide an example of one characteristic/determinant that influences either supply or demand.

Answer 1

New product:

Demand comes first, because a new product only could be produced and supplied in the market if there is demand. Such demand could be understood through a market survey.

Example: suppose a new technology of door locking product is in consideration. The company has to find whether the prospective customers have their wants of such new locking system, and whether they want to pay such price. If these are “yes” then the company can go for supplying.

Necessity item:

Tooth paste: this is indispensible because a person can’t live without brushing daily.   

Luxury item:

Branded car: this is luxury because this is not indispensible but a symbol of status.

Elasticity concept of necessity item:

Income elasticity is inelastic (or less than 1) in case of necessity item – percentage change in quantity demanded is less than the percentage change in income.

Elasticity concept of luxury item:

Income elasticity is elastic (or greater than 1) in case of luxury item – percentage change in quantity demanded is more than the percentage change in income. Suppose people would like to purchase a branded car if they have slight increase in income.

Determinant:

Substitute goods: If a product has substitutes, its demand would be price elastic. Suppose tea and coffee is substitute goods. Increasing price of tea decreases the demand tea, because the demand of coffee increases.