Question:
What happens as new products enter the market? What factors determine gaining market share from existing products? For example, as nylon and polyester entered the market in the 1940s demand for wool decreased drastically. However, in cases of new, similar products, this isn’t always the case. Another example, “milk” like almond, soy, and coconut milk have taken away from conventional dairy milk; however, it’s certainly not as detrimental as synthetic fiber was for wool. How can we determine the factors that will influence consumer buying decisions as consumers have more choices?Answer:
For consumers, changes in prices and per capita income are influential determinants of demand. Consumer demand is often measured as an elasticity, which is a relative measure, providing a useful means of comparison across all ranges of quantities. The price elasticity of demand is a measure of the responsiveness of demand to a change in price. The own-price elasticity of demand is a measure of the responsiveness of demand for a product to change in the price of that product, i.e., the percent change in the quantity of a product resulting from a 1% change in its own price. For example, an own-price elasticity for beef of -0.479 means that a 1% increase in the price of beef decreases demand for beef by 0.479%. A good is said to be price inelastic—not responsive to price—when its own-price elasticity is greater than -1.0. A good is said to be price elastic—responsive to price—when its own-price elasticity is less than -1.0. The cross-price elasticity of demand is a measure of responsiveness of demand for one product to a change in the price of another product; i.e., the percent change in the quantity of a product resulting from a 1% change in the price of another product. The sign of the cross-price elasticity indicates whether the two products are substitutes (positive sign) or complements (negative sign). For example, the cross-price elasticity for beef with respect to the price of pork is 0.087, meaning that a 1% increase in the price of pork increases demand for beef by 0.087%. The cross-price elasticity for coffee and tea, for example, with respect to milk is -0.04, meaning that a 1% increase in the price of milk decreases demand for coffee and tea by -0.04%. The expenditure elasticity of demand is a measure of the responsiveness of demand to changes in total expenditures—for conditional demand, this would be expenditures on a similar bundle of products, and for unconditional demand, this would be for all food and nonfood products.
