Factors That Affect Supply And Demand Of A Product

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In this paper, I will attempt to compute the elasticity of each independent variable given the values and determine the implications for each computed elasticity. I will also be making recommendations on whether the firm should make any changes in price to increase its market share while outlining the significant factors that can affect supply and demand of a product.
Elasticity is the most “commonly used measure of the responsiveness of quantity demanded or supplied to changes in any of the variables that influence the demand and supply functions.” (McGuigan et al.)
The price elasticity of demand is a term often used in economics when discussing price sensitivity.
Price Elasticity of Demand = % Change in …show more content…

When the PED is greater than 1, the demand for the product is said to be elastic meaning that changes in price have relatively large effects on the quantity demanded.
However, PED can also be perfectly inelastic, which is when demand for the good does not change when price changes. At this point, the PED is equal to 0. It is perfectly inelastic when the demand for a good is equal infinity.
Businesses assess price elasticity of demand for various products to help forecast the effect of a pricing on product sales. Usually, businesses charge higher prices if demand for the product is price inelastic. For example, if the quantity demanded for a good increases 25% in response to a 10% decrease in price, the price elasticity of demand would be 25% / 10% = 2.5.
The degree to which the quantity demanded for goods change in response to a change in price can be influenced by a number of factors which include;
1. The number of close substitutes available - A strong substitution effect makes demand more elastic if there are close substitutes. This is because consumers can easily shift from one good to another due to even a minor price change in price. A good with a high number of substitutes will also have a higher elasticity. Conversely, demand for a good with little or no substitute will have inelastic demand.
2. Necessary versus luxury products – Whether a

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