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Direct Relationship Between Demand and Price

Question:

Discuss About The Positive Relationship Among Two Components?

Demand and price has a direct relationship with each other. If the price of a product enhances than directly the demand of the product get affected whereas if the prices of a product falls down than the customers shows more interest in buying the more quantity of the product. Demand and price relationship have a negative relationship with each other in normal scenario but the further analysis over both the components depict that there are various factors which affects the demand and price relationship and sets a positive relationship among both the two components. For instance, if the price of any luxurious product would enhance than the people will get more attract towards that product and would buy it such as diamond and antique pieces. In this study, it has been analyzed that if the price of a product would fall down than will the demand of the product would enhance or the company would be able to earn more revenue and profit through that product. For this study, various journal articles and books have been studied.  

It is a general saying that the demand and price of a specific product has a direct and negative relationship accounting other such as if the price of potato would enhance than the people would stop buying the potato and thus the demand of potato would decrease. Thus these components directly make an impact over other and thus according to the general saying, if the business would decreased the price of their product than the demand of the product would enhance and hence, the company would be able to make more profits. But many economists have argued that this does not take place in every situation and even this law of demand and price is based upon various other factors. Through this report, it has been found that the various factors are available in the marketplace where the law of price and demand does not apply (Mapleton, 2017).

It has been observed through a study that the income of the customer makes an impact over the law of price and demand such as if the income of the consumer would be high than the factor of price would not matter for him or her and they would not leave a product just because of his price. Consequently, with the increment in the price the individual would surely switch to a superior product such as an individual is like to carry watch. With the low income, he was happy with a local brand but after a period of time, when the price of that product get reduce and similarly, the income of the individual would enhance than rather than going for the local brand, individual would like to buy more expensive car as the price is not at all an important factor for him. So, in that case how much a business tries to make profits through reducing the price of the product, but the business won’t be able to earn profits (Baumol, and Blinder, 2015). The below graphs describe the income effect over the law of price and demand perfectly. This graph lines depict that the due to the income factor, the demand of the product  increases with the increment into the price and the fall into the price of the product also makes the demand of the product less in the market.

Factors Affecting the Relationship Between Price and Demand

Consequently, it has been observed that various other factors are also available in the market which also makes an impact over the law of price and demand. Further, giffin goods are the goods which do not have any substitute goods. These goods are unique in nature and there are not any product like that products into the market. However few operations have argued that such products do not exist in actual. The below graph depict that the slope line of Giffen goods is in “d” format. The upward sloping curve of Giffen goods depict that the demand of a product increases with the increment into the price of the product (Canto, Joines and Laffer, 2014). This case depict that the price and demand of a product has a positive relationship and thus it has been found that how much a business tries to make profits through reducing the price of the product, but the business won’t be able to earn profits. The below graphs describe the Giffen goods effect over the law of price and demand perfectly. This graph express that due to the giffin goods factor, the demand of the product increases with the increment into the price and at the same time, the fall into the price of the product also makes the demand of the product less in the market (Freeman, Herriges and Kling, 2014).

In addition, various other factors have also been investigated which depicts a positive relationship among the two complements of economics which are price and demand. Inferior goods have been investigated next to reach over a conclusion that if the price of a product would fall down than will the demand of the product would enhance or the company would be able to earn more revenue and profit through that product (Gopinath et al, 2014).


Inferior goods are those goods which are different from normal goods and the decrement into these price of product enhances the purchasing power of the company and thus the individual buys less unit of such product to buy a superiors quality product. These inferior products are average or even bad in quality and poor people bought these products as they do not have enough money to buy the superior products. But if the price of these products get less than the buyer becomes able to save money and from that saving amount, a good quality product is bought by the buyer (Rios, McConnell, and Brue, 2013).

Income Effect on Price and Demand

For instance, an individual has an income of AUD 100. The price of the bread in the market is $ 2 and the price of a superior bread is $ 3. The individual bought 10 breads a day for himself and the family. A decrement has been observed into the price of inferior bread. It has became AUD 1.5 now. So in that case, the individual would try to buy 2 or 3 breads of superior quality as now he has enough money to buy the same quantity of products and good quality product in the same amount.

Thus it has been found that in the case of the inferior products, there is an positive relations between both the components (Nicholson and Snyder, 2014). This study depicts that with an increment in the price, the demand of the product would be high and with the decrement into the price of the product, the demand of the product would also be less. Thus it has been observed that the price and demand of a product has a positive relationship and thus it has been found that how much a business tries to make profits through reducing the price of the product, but the business won’t be able to earn profits (Newbery, 2016).

Thus through interpretation and analysis over the literature review, it has been found that various factors are there to make an impact over the relationship of price and demand. As it is generally saying that the demand and price of a specific product has a direct and negative relationship with each other (Moon, 2013). Further, it has been argued that this relationship does not take place in every situation and even this law of demand and price is based upon various other factors. Through this report, it has been found that the various factors are available in the marketplace where the law of price and demand does not apply.

Conclusion

Through the above study, it has been found that various factors are available in the market to affect the relationship of the price and demand factor such as income effect, giffin goods, inferior goods, nature of the customer, fashion, likes and dislikes of the customer, loyalty for a brand etc. in this study, the main question was if the price of a product would fall down than will the demand of the product would enhance or the company would be able to earn more revenue and profit through that product.

Through the literature review, it has been found that the price is not a single factor to manage the demand of the product in the market, there are various other factors are also available in the market to affect the relationship of the price and demand factor. so it could be said that the decrement in the price do not always enhances the demand of the product and helps the business to earn  more profits

References:

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Blair, R.D. and Kaserman, D.L., 2014. Law and economics of vertical integration and control. Academic Press.

Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and evidence. Academic Press.

Freeman III, A.M., Herriges, J.A. and Kling, C.L., 2014. The measurement of environmental and resource values: theory and methods. Routledge.

Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014. Handbook of international economics (Vol. 4). Elsevier.

Mapleton, C.2017. Demand and Supply: 500 Practice Problems Solving for Equilibrium. Lulu.com

Moon, M.A., 2013. Demand and supply integration: the key to world-class demand forecasting. management.

Newbery, D.G., 2016. A simple introduction to the economics of storage: shifting demand and supply over time and space.

Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

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