The main factors determining the level and structure of demand are the income of buyers and prices in the market. To study the influence of these factors on purchasing demand, measuring the elasticity of supply and demand (their response to changes in social and economic conditions in the market), various factor models are used in economic science and practice, usually on the basis of correlation regression analysis or groupings. However, the empirical coefficients of elasticity obtained on the basis of single-factor models are imperfect. Therefore, different approaches for studying the elasticity of demand and consumption on the basis of multi factorial models are used. This models characterize the level of profitability and the price factor as a whole .
Consumer demand is the main factor of the country’s economic growth. The consumer demand is directly affected by the potential of the domestic commodity market. One of the largest segments of the market is a segment of consumer products.
The income of the population is usually related to demand by direct dependence , which means the richer the population , the greater the demand. Increase in money income will shift budget line to the right upwards. A similar result can be achieved by reducing the prices of both products , which also means an increase in real income.
The elasticity of demand for the price is determined by a lot of factors such as : consumer preferences, availability of substitutes , and expected duration of price change. For example: the increasing number of substitute goods that satisfy a common need available on the market lead to the higher elasticity. Goods that do not have substitutes (for example, insulin) are inelastic.
An important factor of understanding the determinants of demand is to differentiate among uncompensated and income-compensated price elasticity of demand. Also the construction of cross-price elasticity is significant from a policy viewpoint , because relative shifts in prices through taxation or subsidies may have an effect on demand for other products not regulated by policies.
Assessment of price elasticity of demand is a useful factor in the development of a tariff scale for taxes on goods and services. Calculations of price elasticity allow politicians to differentiate between inelastic and elastic goods. Such calculations are also useful in forecasting demand as a result of price changes and in adopting proposals for the reform of taxes on goods and services that can increase revenue collection and minimize the impact of social policies.