Paper #1 (Economic) Essay Example | Topics and Well Written Essays - 750 words

Paper #1 (Economic) - Essay Example The price elasticity of demands demonstrates how the demand for a product is affected by a change in its price. A simple mathematical formula which expressed the relationship and provides a way to calculate price elasticity is (% change in quantity / % change in price). There are several factors that can affect demand elasticity. These are availability of substitutes, amount of income available to spend on a good, and time (Investopedia, 2007). A substitute product is an item that might not compete directly with a particular product, but has similar characteristics and can replace the consumption for the original product. For example Pam spray is a substitute product for corn oil. A substitute product is the factor that influences elasticity the most. The higher the amount of substitute products available in the market that can replace a product, the more price sensitive a product becomes. A product with few substitute products that the consumer needs is considered to be in inelastic because changes in the price of the product will not affect the demand for the product that much. â€Å"Caffeine is an inelastic product because it lacks substitutes† (Investopedia, 2007). The level of income a person has is another factor that affects elasticity. A person might want a particular item, but if his economic reality does not allow him to afford the item then he is not considered in the demand equation of a product. The way income affects demand the most can be seen by a person’s consumption of a product he regularly purchases, for example soft drinks. If a person’s income decreases by half the most likely scenario is that this individual will lower his consumption of soft drinks, thus lowering the overall demand for the product. Time can convert an inelastic product such as tobacco into elastic if a person begins to lower his purchase frequency by reducing his consumption of the item over