This essay will focus on the relationship between price, income, taste and consumer demand. It begins by reviewing related theories and then will be followed by a series of empirical evidences to support the theory explained before. Finally, the essay will briefly summarize what have been discussed.
Price and consumer demand
“Price” in the question can be viewed by 2 ways. First, it means the price of good itself. According to Perloff (2009, p12), the price of good itself has negative relationship with consumer demand. It can be clearly seen through a downward sloping curve in Figure 1.Comparing with the price level at Point A (10), people demand more goods at Point D when price is 4. Therefore, the change in price of good itself causes the movement along the demand curve.
Figure 1: A demand curve
Singh et al. (2012) have proved this by exploring how demand of tobacco products responded to the price rise in India. Recently, “price of tobacco products was increased due to ban on plastic sachets of chewing tobacco and increased tax in Rajasthan” (Singh et al. 2012). Singh et al. collected information from local retail tobacco shops and consumers. They got the result that the demand of tobacco products would decrease in various degrees due to the price rise. Specifically, the price of cigarette increased by 19% which led to 14% decrease in sales and 15% decrease in consumption (Figure 2). The decrease in sales and consumption would in turn resulted in the decline in demand of cigarettes.
Second, except for the price of goods itself, “price” also refers to the price of related goods. From Sloman and Sutcliffe (2004, p66), both price of substitutes goods and complementary goods have effects on consumer demand. If substitute goods go down in price, the demand of this good will decreases. Anderson (2010) used some theoretical models to explain demand for ethanol as a gasoline substitute. Anderson assumed that ethanol and gasoline were perfect...
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