The Impact of an Exercise Tax on Demand, Supply, Price, and Quantity Essay

The Impact of an Exercise Tax on Demand, Supply, Price, and Quantity - Essay Example There are several factors that affect the price elasticity of demands. One of these factors is the level of prices. Expensive goods such as cars have a high elasticity of demand as a result of the sensitivity to price changes. On the other hand, the price elasticity of demand for inexpensive good such as matchboxes rarely changes the demand by a significant amount. Another factor that affects the price elasticity of demand is the income level. The elasticity of demand for any product is less in groups with higher income levels as compared to the low-income levels. This is as a result of the fact that the impact of prices changes is bigger to the poor people than the rich (Varian 320). The availability of a close substitute is another factor that affects the elasticity of demand. Demand for a product with many substitutes, for example, Pepsi is more elastic as compared to that with a few or no close substitutes such as salt. Lastly, the nature of a commodity is another factor that affects the price elasticity of demand. Necessity goods such as vegetables have inelastic demand while comfort goods such as refrigerators have elastic demand. Luxurious commodities such as cars have more elastic demand than comfort goods (Varian 323). For a consumer to maximize utility he must be at the consumer equilibrium condition. Economists express this condition by equating all of the marginal utilities per dollar that the consumer spends in buying a certain commodity. As seen from the above calculation, there is no single equation where the marginal utility per dollar is at equilibrium hence there is no combination where the consumer has the option of maximizing the utility.