Non Price Factors of Demand

There are various factors other than price that change the Demand of a product or service
and hence cause a shift in its Demand Curve.

Income (Disposable Income):

It is the income after income tax and national insurance contributions have been
deducted.

When income rises the purchasing power of people increases and thus the demand of
the products increases. When income decreases, the purchasing power of people
decreases and thus the demand of the products decreases.

Changes In The Price Of Related Products:

Substitute: A product that can be used in place of another (Pepsi or Coke)

Complement: A product that is used in conjunction with another product. (cd player
and cd’s)

Advertising:
Successful advertising campaign of a product increases the demand of that product.
As it may bring the product into the notice of new customers and may encourage
existing customers to purchase more quantities of the product.

Changes In Population:

Weather:
Non Price Factors of Supply
There are various factors other than price that change the Supply of a product or service and
hence cause a shift in its Supply Curve.

Cost of Production:
Cost of production is the amount of money used in producing a good. It might
change due to the changes in the price of any of the factors of production (i.e. raw
materials)

Improvement in the Technology:

Use of latest technology in production would improve the productivity and hence
cost of production per unit would decrease and producers would be able to supply
more of that product.

Taxes:
Tax: a payment given to the government

Indirect tax: tax imposed on goods and services

Subsidies:
Subsidy: a payment given by the government, to encourage the production or
consumption of a product.

A subsidy given to a producer provides a financial incentive for them to supply more
as producers would have more capital to produce.
 Weather Conditions:
They affect particularly agricultural products.

If the weather is good around harvest the supply of that crop would be more and
vice versa if the weather is bad around harvest the supply of that crop would be less.

Price Elasticity Of Demand

Price Elasticity Of Demand, measures the responsiveness of demand to a change in price.

The formula used to calculate (PED) is:

PED = % change in qty demanded

% change in price

Price Elastic Demand: When demand changes by a greater percentage than the
changes in price.
Price Inelastic Demand: When demand changes by a smaller percentage than the
changes in price.

Revenue Maximization By Using Price Elasticity Of

Demand:
Revenue: Total reward of producing goods and services.
Formula:

 Price/unit × Quantity produced /demanded

 Total cost + Total profit
The above diagrams show that:

If demand is inelastic, producers must charge high prices in order to maximize

revenue.

If demand is elastic, producers must charge low price in order to maximize revenue.

Factors Affecting Price Elasticity Of Demand:

Availability Of Substitutes:
Substitutes more available PED will be elastic

Less substitutes available PED will be in elastic

Proportion Of Income Spent:

Small proportion (e.g. salt) PED will be inelastic

Large proportion (e.g. car) PED will be elastic

Nature Of Product:
Need (e.g. bread) PED will be inelastic

Luxuries (e.g. car) PED will be elastic

Addictive / Habit forming:

Cigarettes are addictive thus it will have inelastic PED.

Fashion and Trend:

In fashion PED will be elastic

Out of fashion PED will be inelastic

Price Elasticity Of Supply
Price Elasticity Of Supply, is the measure of the responsiveness of supply to a change in
price.

The Formula used to calculate Price Elasticity Of Supply is:

PES = % change in qty supplied

% change in price

If the answer using the above formula is less than 1 than the product has price
inelastic supply
however, if the answer is greater than 1 than the product has price elastic supply.

Price Elastic Supply: When supply changes by a greater percentage than the
change in price.
Price In Elastic Supply: When supply changes by a smaller percentage than the
change in price.

Factors Affecting Price Elasticity Of Supply:

Gestation Period:
Gestation period is the time period needed in which goods and services can be
produced.

Longer gestation period(e.g. wheat) Inelastic PES

Shorter gestation period(e.g. bread) Elastic PES

Nature of The Product:

Perishable (can’t be stored for a longer period) Inelastic PES

Durable (can be stored for a longer period) Elastic PES

Availability of Raw Materials:

Not easily available (wood for wooden furniture) Inelastic PES

Easily available (plastic for plastic furniture) Elastic PES

Labour:
Easily available Inelastic PES

Not easily available Elastic PES

Usefullness of Price Elasticity To Producers

Knowledge of Price Elasticity would help the producer in many ways while making a decision
such as:

Pricing Policy:
The knowledge of price elasticity might help a producer to analyze the impact of
changes in price levels on the demand for its product and consequently on its
revenue.

The producers can use this to decide the price of the product

If the demand of the product is price elastic, by lowering its price they would earn
greater revenue. If the demand of the product is price inelastic, by raising its price
they would earn greater revenue.

Indirect taxes:
Furthermore, the producers could use the knowledge of price elasticity of demand to
decide whether to bear high proportion of indirect taxes themselves or pass it on to
consumers in the form of high price.

Elastic demand: Producer’s bear high proportion of tax and charge low price.
Inelastic demand: Producer’s can pass a high proportion of tax in the form of high
prices to consumers.

Effect of subsidy:
Benefits of subsidy given by the government can also be analyzed by the price
elasticity of demand.

If the demand of the product is price elastic than the producers could get a greater
benefit of the subsidy given by the government.