Question

a. Explain how price elasticity can be elicited through experimentation. Why is this likely to
tell you about a relatively small part of the demand curve you are interested in?

b. Price is not the only factor that comes into play in determining how much of a product
consumers will demand, and these other factors will need to be taken into account when a
firm tries to forecast how much of a product it should aim to produce and sell. Explain what
the main other factors are and how they will affect demand.

Answer 1

A.

Price elasticity of demand refers to the responsiveness of quantity demanded to a change in its price.  

Price elasticity explains how much quantity increases or decreases to change in its price.

Its explains how and why quantity demanded changes to change in the price of product. We can assume other things remains same, the price of butter decreases and no changes in income of consumer, taste and preferances and fashion. It is through price elasticity of demand we can calculate the exact quantity of butter that consumer buy as a result of fall in price.

Say for example price decreases by 3 % and the consumer increases the quantity by 5 %. This show the more elastic part of the demand where smaller change in price leads to higher changes in quantity demanded. In this situation price elasticity should be greater than one.

The other cases are less elastic where large change in price causes small changes in quantity demanded.

The unitary elastic demand shows the equal amount of changes in both price and quantity demanded.

B.

Price is only one of the factor that influence demand. The laws of demand assumes other things being same, as price increases ,quantity demanded decreases and vice versa.

The are several other factors that influence demand decision of individual. They are income of the consumer, taste and preferences, fashion, taxation policy, government policies, demonstration effect etc. We can see various factors that can simultaneously influence the consumption pattern of individual.