Discuss the factors, which affect demand: Explain the concept of price elasticity of demand and its significance to governments and producers.

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 3 (695 words) Published: April 8, 2006
Demand is the quantity of goods or services consumers will buy at a particular price, at a particular time period. Market demand refers to the sum of individual demand for a good or service. It is assumed that the demand being represented is effective demand- the ability of consumers not just to want, but be able to buy the product. Quantity demanded is the inverse function of price, however there are other factors which influence the level of demand.

Factors influencing individual demand differ from the factors influencing market demand. The price of other goods and services affects the demand for a product. If a product has close substitutes, then the responsiveness of demand to change in price is high. The level of income of an individual also influences demand (especially effective demand). The higher ones income the number of wants to be satisfied. People on higher incomes spend more money on goods and services in absolute terms, but less in proportional terms due to their lower average propensity to consume. Personal preference and trends in fashion also dictate the level of individual demand.

The size of the population, age composition, distribution of people by sex, and socio-economic status influence the market demand. Big businesses study the composition of the population to best establish their most viable market place. Both consumer expectations and the level of technological progress influence market demand.

These factors may affect demand either positively or negatively, resulting in an expansion or contraction of demand. The following model works on the assumption that aside from price all other factors will be kept constant.

When the demand curve shifts to the right or left this results in consumers willing to buy more/less of the product at every possible price. A shift in the demand curve could be resulting from changes in tastes, real income, population size and composition, consumer expectations or technological progress. These...
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