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May 01, 2023


1. The determinants of demand for a good are given below

Price of the product: Price is the most important determinant of demand for a product because the consumer exchanges the price in monetary value with the supplier to get the product. By the utility theory the utility gained by the consumer is expressed in terms of the price of the good. When prices rise, the demand for the goods decrease because the consumer feels that they are paying more than the value the good. By law of demand the price and quantity demanded has a negative relationship and so the demand curve is negatively sloped. For price changes we find movement along the demand curve. 

Income of the consumer. The income of the consumer is not the main determinant but is another determinant of demand for goods. The consumer maximizes his utility based on the income he gets every month. When the income of the consumers increases keeping the price of the good constant, the consumers has left over income to buy more of the good and hence demand increases. Since the price of the good is kept constant in the price quantity space the demand curve shifts to the right when demand changes increase due to income increase. 

Price of Related goods: the price of substitute goods are related to the quantity demanded of a specific good. For example tea and coffee are substitute goods or they give the same utility and consumers can consume either of them. When coffee`s price rises the demand for tea would increase as now tea is a cheaper product and again consumers don`t like to buy coffee as it is overvalued in terms of price. 

2. Consumer surplus can be defined as the difference between the price the consumer is willing to pay and the price he actually pays. Calculating from the demand curve we find the consumer surplus can be calculated by the area of the triangle below the demand curve and above the equilibrium price. And imposition of tax means the government levies a surcharge over the price that is generally paid. The effect of tax on the consumer surplus happens through in different stages. The imposition of a tax increases the price being paid by the consumer and the price collected by the producer. Hence the tax creates a wedge between two prices as shown in the diagram. Earlier the price was at Pm but now the price paid by the consumers increased to Pb and falls to Ps for the producers.  

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