Economic factors that determine the price of goods

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Economic factors that determine the price of goods

The following are the main factors which determine the price elasticity of demand for a commodity: The Availability of Substitutes 2. The Number of Uses of a Commodity 4.

Complementarity between Goods 5.

Economic Definitions

The Availability of Substitutes: Of all the factors determining price elasticity of demand the availability of the number and kinds of substitutes for a commodity is the most important factor. If for a commodity close substitutes are available, its demand tends to be elastic.

If the price of such a commodity goes up, the people will shift to its close substitutes and as a result the demand for that commodity will greatly decline. If for a commodity substitutes are not available, people will have to buy it even when its price rises, and therefore its demand would tend to be inelastic.

Economic factors that determine the price of goods

For instance, if the prices of Campa Cola were to increase sharply, many consumers would turn to other kinds of cold drinks, and as a result, the quantity demanded of Campa Cola will decline very much.

On the other hand, if the price of Campa Cola falls, many consumers will change from other cold drinks to Campa Cola. Thus, the demand for Campa Cola is elastic. It is the availability of close substitutes that makes the consumers sensitive to the changes in the price of Campa Cola and this makes the demand for Campa Cola elastic.

Likewise, demand for common salt is inelastic because good substitutes for common salt are not available. If the price of common salt rises slightly, the people would consume almost the same quantity of salt as before since good substitutes are not available. The demand for common salt is inelastic also because people spend a very little part of their income on it and even if its price rises it makes only negligible difference in their budget allocation for the salt.

The greater the proportion of income spent on a commodity, the greater will be generally its elasticity of demand, and vice versa.

The demand for common salt, soap, matches and such other goods tends to be highly inelastic because the households spend only a fraction of their income on each of them.

On the other hand, demand for cloth in a country like India tends to be elastic since households spend a good part of their income on clothing. If the price of cloth falls, it will mean great saving in the budget of many households and therefore they will tend to increase the quantity demanded of the cloth.

On the other hand, if the price of cloth rises many households will not afford to buy as much quantity of cloth as before, and therefore, the quantity demanded of cloth will fall.

The Number of Uses of a Commodity: The greater the number of uses to which a commodity can be put, the greater will be its price elasticity of demand.

If the price of a commodity having several uses is very high, its demand will be small and it will be put to the most important uses and if the price of such a commodity falls it will be put to less important uses also and consequently its quantity demanded will rise significantly.

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If its price rises to a very high level, it will be used only for essential purposes such as feeding the children and sick persons. If the price of milk falls, it would be devoted to other uses such as preparation of curd, cream, ghee and sweets. Therefore, the demand for milk tends to be elastic.

Complementarity between goods or joint demand for goods also affects the price elasticity of demand. Households are generally less sensitive to the changes in price of goods that are complementary with each other or which are jointly used as compared to those goods which have independent demand or used alone.

Now, if the price of lubricating oil goes up, it will mean a very small increase in the total cost of running the automobile, since the use of oil is much less as compared to other things such as petrol.Economy U.S.

Economic System An economic system refers to the laws and institutions in a nation that determine who owns economic resources, how people buy and sell those resources, and how the production process makes use of resources in providing goods and services.

Determinants/Factors of Price Elasticity of Supply: The main determinants/factors which determine the degree of price elasticity of supply are as under: (i) Time period. Time is the most significant factor which affects the elasticity of supply. Feb 17,  · Well, there are many economic agents whose influence can affect significantly prices.

First, the basic, supply and demand, if any other factors meddle with the market dynamics they will settle the price. A market is a medium allowing buyers and sellers of a specific good or service to interact in order to facilitate an exchange.

What are 'Consumer Packaged Goods - CPG' Consumer packaged goods (CPG) are items used daily by the average consumer. The goods that make up this category are ones that need to be replaced.

Economic development: Economic development, the process whereby simple, low-income national economies are transformed into modern industrial economies. Although the term is sometimes used as a synonym for economic growth, generally it is employed to describe a change in a country’s economy involving qualitative as well.