The Effect Of Price And Demand On Various Goods

The Relationship Between Demand and Price

Question:

Discuss About The Affected In Various Situations Such Goods?

Demand and supply are the crucial elements of an organization’s manufacturing system. These elements are the important aspect of the economical model. In the normal market scenario, the price of a product could vary due to the supplied product level and the demand level of that product. This theory would offer the result to the company in equilibrium of quantity and price. Deductions in the price directly make an impact over the demand increment and whereas if the price would rise than the demand would be decreased. It has been observed that in various cases, comparable income and substitution effect has been witnessed. It has been found that with the in case of diverse situation, the price and demand rules could offer different result. These rules go ahead in the way where substitution effect is quite confirmed[1]. Though it has been observed that if the entire situations are normal than the changes into the price directly make an impact over the quantity demanded. This depict that the effect of substitution would influence the clients constantly to buy the goods in lesser price.

Income effect only works with some assumptions. But in reality, various aspects are there which affects the price and demand relationship. It is a universal fact that the increment in the income would enhance the customer’s buying power. Price and demand relationship could be affected in various situations such as Giffen goods, inferior goods etc[2]. inferior goods are those goods which are totally opposite to the normal goods as in the scenario of inferior goods, with the increment in the level of income and the demand level decreases such as if a customer’s income would be enhanced than he will switch from the bread to the pizza and then the demand of bread would be reduced. As now the person would like to go for the superior goods than the inferior goods[3]. At the same time, it has been observed that the inferior goods have a positive relationship with the income. If the income would be enhanced than the demand would be less and at the same time if the income would be lower than the demand would be enhanced. Further, the changes into the price impact over the purchasing power of the company, if the price would be lowered than the purchasing power of the customer would be enhanced as in that case, customer would be able to save more money for other products[4]. Consequently, the income effect has been analyzed and it has been observed that it works in the same manner as the substation effect does. Equally the factors are operating towards enhancing the quantity which has been demanded. Further, in the inferior goods case, the effect of income is negative; as it works in the repeal way to the substitution effect.

Income and Substitution Effects

The outcome of price change varies according to the market situation and the customer. Mainly, the price changes get affect due to the main two factors of virtual strength. Thus, the effect of price is directly linked with the substitution effect and the income effect[5]. These aspects of the demand of the product make changes into the result which could be occurred as the changes into the price. This outcome mainly depends according to the income effect strength[6].

In normal scenario, price-demand relationship could be recognized as an indifference curve. So according to the given graph, price of two products and the demand of the product could be plotted. The graph line expresses that the equilibrium point for the consumer would be at A point. If the price falls in that case than the price of Y product and income of the customer would be remain unchanged. This would make the changes into the graph line. The Effect in the price would now divide into Income Effects and Substitution.

This graph depict that the consumer would get equilibrium point at the budget line, if the equilibrium point lies over the right of Q, that depicts that the purchaser would buy more quantity of product. Hence it has been confirmed that an individual could buy further normal goods at the point of new equilibrium on budget line.   This would result in an increment in the demanded quantity which results in decrement in the price[8].

Further, the changes into the demand of the products directly depend according to the strength of substitution effect and the income effect. Income effect depict about a positive relationship in this case. This would cause an enhancement into the products demand at the time of decrement in the price.  At the same time, in substitution effect case, the products demand decreases because of price decrement.

Further, it has been found that the inferior goods have a conflicting income effect. As at the time of decreasing the price inferior goods demand also decreases which makes a negative income effect. Due to that, the purchased quantity decreases, although the substitution effect enhances the total purchased quantity. An individual expend a small division of his or her income on a specific product[9]. If in any case, the price falls, than it makes a slight income effect. Generally, this offset the effect of substitution.

A decrement in a good’s price constantly depicts the consumer to purchase more products. In various cases, the price decline would enhance the demanded quantity[10]. In inferior goods case, the quantity demanded make changes along with the changes into the good’s price. In such cases, the law of demand of Marshallian would work.

Giffen Goods, Inferior Goods, and Normal Goods

If the income effect would be functioning in a proper manner than it the individual would provoke to purchase fewer goods. Though, the substitution effect persuades the consumer to purchase goods in lesser price relatively.

as a result, the net effect on products  because of declining into the product makes an impact in the quantity demanded as enhancement in demanded quantity. The Quantity demanded get changes due to negative income effect in the market. In that condition, weaker income effect makes a downward sloping demand curve.

Griffin goods are those goods in which depict about the negative income effect. In this case, a negative income effect is there which overcome the effect of substitution. when a product’s price falls than it direct makes an impact over the quantity as the purchase power of the individual would also decline. Though, when product’s price enhances, the products purchase quantity would also be enhanced.

These relationships have a direct link among the products and the price. Increment in the Griffin product’s price would also enhance their increment. The effect of income substantially would make an affect over the spending of the individual over a huge proportion. Decrement in the price of the product would offer a result into income release[11].

For instance, Enhancement in the bread’s price would offer an outcome in the decrement into the purchasing power of poor individuals. So, it becomes quite compulsory to make a decrement into the luxurious product’s price.  Individuals are tend to bought and consume the Griffin products. It does not matter for them that how much prices has been enhanced. Consequently, when the price of any inferior product enhances than the people starts spending a huge amount to buy that product[12].

Decrement into the price of the inferior product at a huge level makes an impact over the purchasing power of an individual. The inferior products make an impact over the purchasing power as well as the consumption level of the individual. Due to this effect, the entire consumption reduces and it makes a negative impact over the income effect.

The connection of price-demand in Giffen products case is initially into equilibrium point, due to a decrement in the product’s price. Due to this, the indifference curve shifts. This takes place due to negative income effect over the products, income and demand relationship[14]. It provokes the individual to buy the less quantity of the product.  In Griffin Goods case, the quantity which has been demanded varies directly along with the product’s price. The quantity which has been demanded of Giffen goods differ according to the price. And thus, in this case the negative income effect is quite more than substitution effect. Therefore, the in this situation demand curve would slope downward[15].

The Impact of Different Market Conditions

Conclusion

Thus through this report, it could be concluded that the decrement in the price would not always take a place due to increment in the demand. There are few conditions in which a direct relationship could be seen among income and demand relationship of a product. For understanding the effect of price and demand, it is required to understand following three aspects which are Inferior, Griffin and Normal Goods. The demand and price both varies in a different way which depends upon the nature of goods. Thus it could be concluded that, the decrement in the product’s price would not causes an enhancement in the demand level always. Under certain situations, the effect might pull in dissimilar directions. It go ahead in the direction where substitution effect is quite certain

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[15] Sivagnanam,. (2010) Business economics, Tata McGraw hill education, India