In business, pricing can be a significant determinant of whether a product will be in high demand or low demand. The relationship between price and demand is an interesting one. The link expresses itself in what we call a demand curve. As a result of the relationship between both components, they become very relevant in the process of making business decisions.
The question is: how do lower prices tend to affect demand?
No doubt, prices affect demand as there is a relationship between them. However, the question that we seek to answer is, how do lower prices tend to affect demand? In answering this question, we must note that the effect of lower prices on demand depends on the type of product we are referring to per time. In some cases, lower prices might increase demand. Other times, it might not be so. Continue reading to understand this relationship better.
Continue reading for more useful information regarding this topic!
What Is The Meaning Of Price?
Price refers to the amount of money a person is willing to pay to get a particular product or service. Since price is what a person is willing to pay for a specific good or service, it goes to the effect of helping us determine the monetary value of a thing. Thus, one can also use price to measure the value of goods and services.
Thus, when we talk about pricing, we are referring to the method the producer or manufacturer introduces in determining the value of the products in monetary terms. The price that goods and services go for in the market is essential to any business person.
Things To Consider During Pricing
People go into business with the primary aim of making profits. The goal of making profits will not be achievable when you fail to fix the right price. Thus, the manufacturer needs to take into consideration certain factors when determining the cost of his products and services.
The manufacturer has to consider the nature of the product and service. For instance, where the product is a perishable item that needs to sell out as soon as possible, it might make the price to differ from another product that has a lifespan of two to five years.
At other times, the manufacturer needs to take into consideration the prices of other goods and services that are similar to the one he is bringing to the market. It is essential to do this because a standard already exists in the industry. The standard, which if not carefully and tactfully followed, might affect the interest of the consumer in his products.
The target audience or market of the goods and services he is producing will also determine the price for it. Where the product is targeting the rich, the price will be higher as the perceived value will be higher in the eyes of the targeted consumers. However, where the target market is the low-income earners, it has to be very affordable and serve their best interest.
One primary determinant of the price of a commodity, which the producer cannot afford to ignore, is the cost of production. If the manufacturer does consider the cost of production before fixing the price of his product, he might run at a loss, and in no time, the business is bound to crash. The right price should be able to cover all costs incurred in putting the product together and still enable the producer to make profits for all his troubles.
Apart from all these other factors, other factors could play an integral role in determining the prices one can fix for a particular product or service. The factors could be legal issues, policies by the government, and the economy.
What Is Demand?
Demand refers to the interest a consumer shows in acquiring goods and services, backed up with the willingness to purchase it at a special price. Demand can either refer to a specific product or the total demand for all the goods within an economy.
Understanding the level of demand for a particular product is crucial to producers. It helps them to know the level of interest their product is generating. Also, it enables them to figure out the quantity of the products they can sell at a particular price.
The Factors That Affect Demand
Several factors affect the rate of demand per time. Although the price is one of the elements, it is not the only factor that consumers take into consideration before buying a product or service.
Another factor that affects demand is the income of the consumer. When there is an increase in income, demand is bound to increase as there will be more money to use in purchasing more quantities of the product and thus, consuming more.
Also, the different hobbies and preferences of consumers determine the level of interest that a particular product will generate. When the taste for a specific product increases, the demand for it is bound to grow, and vice versa.
The expected future price is another factor that consumers also consider which directly affects their demand for it. Asides that, the number of consumers present in the market affect demand. The more consumers that are present, the more demand will increase.
The Relationship Between Price And Demand
Taking a look at the concept of price and demand, it is evident that there is a relationship between them. Thus, we must examine the relationship in detail to understand the scope of this discourse fully.
The relationship between price and demand is an inverse relationship. It means that the proportion of price to demand is inversely in nature. Thus, in a situation where price increases, the resultant effect is that the demand for the commodity reduces. The reverse also applies where there is an increase in demand; thus, the price decreases.
The principle is what we refer to as the law of demand. It is a general law that applies to price and demand. However, like all general laws, it is subject to some exceptions and is not absolute in all cases. The demand curve is what shows the relationship between price and demand.
Some of the exceptional cases where a change in price might not necessarily lead to a shift in demand and vice versa are when we are referring to luxurious goods, Giffen goods, etc.
Companies are now tapping into big data. By scraping prices, that allows better customer insight, and hence better pricing strategy versus demand respectively.
How Lower Price Affects Demand
When there is a reduction in the costs of goods, naturally, it tends to arouse the interest of consumers in the product. Consumers are always eager to secure the best deals for as little money as possible.
The Reasons For The Law Of Demand
There are two primary reasons for the law of demand. In essence, demand reduces when prices increase, and vice versa, for two primary reasons.
The first reason is the effect of income. When a consumer experiences an increase in his income, he becomes willing to pay more for the consumption of goods and services. As a result, he can now afford products that are higher in price and also quality. However, consumers with lower incomes will not be able to afford more consumption of products and services.
The second reason for the law of demand is what we may refer to as the substitution effect. It is a principle that when the price increases, the demand for the product will fall. The rationale behind this phenomenon is simple. Since people do not want to pay more to consume that same product, they will naturally gravitate towards other alternative goods, which we can also refer to as substitutes.
The Demand Curve
The graphical diagram that shows us the relationship between the price and demand is what we refer to as the demand curve. It is the demand curve that shows the inverse relationship between price and demand at a glance.
The demand curve usually runs in a downward slope and runs from the left to the right. It is from the demand curve that one can categorically say that most times, demand is a function of the price of a product.
The demand curve centers on the assumption that all the other factors remain constant. Thus, it relies on the ceteris paribus assumption. However, a demand curve can shift, and the shift could either be to the left or the right. Where the demand curve shifts, it would result in a lower or higher quantity in demand when pegged at a particular price.
The issue of demand and price is one that any business person has to continually keep in view to stay relevant and make a profit. Thus, a business person needs to understand how price and demand relate to each other. Not just that, there is also the need to know how lower prices affect demand.
That way, the producer can determine the right prices for his product and also evaluate the level of demand for his product. The essence is to position yourself in a manner that enables you to compete favorably in the market.
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