Factors Influencoing Household Demand

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Q1 – Analyse the factors which may influence the household demand at a micro level for consumer goods. 1250 words

If the economy is defined as the institution which facilitates the production, exchange and consumption of goods, then the micro-level economy is that pertaining to individual goods and the factors and behaviours affecting individual products. When these micro level economies come together, they combine to create the (macro) economy. Part of the structure of micro economy is the behaviour of households as one of the economic agents. Alongside firms (producers), their decisions and actions are among the most significant features of the circular flow of income model. Central to the model is the consumption by those households
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As Apple Inc. reduces the cost of the item, sales are likely to increase significantly as the product becomes available to more households. A similar elasticity applies to household income and different goods known as ‘income elasticity '. As incomes change, some goods will be affected (income elastic goods) more than others (income inelastic goods). Again, the example of black & white TV 's shows how an inferior good has negative income elasticity.

Substitute & Complimentary Goods
The concept of elasticity also leads to another factor affecting household demand as the quantity demanded for one good can impact the price of another, thereby affecting the household decision to buy. This is determined by understanding the result where the percentage change in demand of one good is divided by the percentage change in price of another within the same sector. If the resulting value is positive, the relationship of the goods is described as ‘substitute '. If the value is negative then the goods are regarded as ‘complimentary '. An example of a complimentary good might be CD 's. If the price of DVD recorders increases, then the demand for blanks DVD 's may drop as consumers decide not to purchase a recorder. A substitute good can be shown in the example where the price of DVD players reduces (leading to increased demand), therefore leading to reduction in demand for video players. The DVD is substituting the video

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