Private Consumption – Supply / Demand
List three (3) goods or services that you buy frequently. Fill in the following details for each good or service in the provided table:
- The current price and the quantity that you normally buy.
- A higher price than the current price and the quantity that you would buy at that price.
- A lower price than the current price and the quantity that you would buy at that price.
Now, consider the price, and the quantity that you are willing to purchase at that price and answer the following questions.
- How does price influence the quantity of an item you are willing or able to purchase?
The price of a product determines the quantity of that product which one can purchase. For example, an increase in the price of shoes leads to a reduction in the number of shoes purchased. Similarly, the price of movies affects the quantity purchased. An increase in the price of movies causes a reduction in the number of movies purchased at a particular time (Salvatore, 2008). In other words, there is an inverse relationship between the quantities demanded of a product and its price. The higher the price, the lower the quantity that someone is willing or can purchase at a particular time.
- Does it make a difference if the item is an essential item, like food vs. a luxury item like a sports car whether you are likely to continue to purchase the item even if the price goes up?
There is a significant difference when dealing with essential commodities such as food items compared to when dealing with luxury goods and services. In the example above, the quantity of bread purchased remained two units, whether there is an increase or a drop in price. On the contrary, the number of movies bought increased to four units when the price dropped to $8, while the quantity dropped to two units when the price increased to $15. For essential items, the quantity remains the same, whether the price is increased or decreased. However, the number of luxury goods demanded depends on the prevailing market prices (Salvatore, 2008). An increase in price causes a rapid drop in the quantity demanded while a decrease in price raises the quantity demanded.
- Consider what you can infer from your own purchasing habits about price and demand? Explain your answer.
From the purchasing habits portrayed in the tables, the quantity demanded is inversely related to price. That is, the higher the price of a commodity, the lower the demand, and vice versa. However, the demand for essential goods and services differs from the demand for luxury goods, as witnessed in the case of movies and bread. When the prices of essential commodities increase, consumers maintain the quantities purchased but react by adjusting the budgets for the luxury goods and services (Salvatore, 2008). Essential goods are an exemption to the popular law of demand.
Then respond to the three essay analysis questions in 2-3 paragraphs each!
The law of demand states that when all other parameters are held constant, the demand for a good or service is inversely related to the price. That’s is, if the price of a commodity or a service increases, its demand reduces and vice versa. Economists apply the law of demand to explain human purchasing habits for both essential and luxury goods (Salvatore, 2008). However, the law of demand is based on several assumptions. For example, it assumes that there no change in consumer tastes and preferences and that the income of the consumers does not change. It assumes that the commodity has no substitutes and that the habits of the consumers remain unaltered. Opponents of the law of demand argue that it is one-sided since it only tells about the effect of change in the price of a commodity on the quantity. They believe that the law ignores the effect of change in quantity demanded on the price. Others argue that the law of demand is tantamount to perfect market conditions that have unrealistic assumptions. However, the application of the law of demand in analyzing aspects such as consumer behavior and customer buying habits cannot be underestimated.
Under normal circumstances, the demand curve moves from right to left. However, in some instances, the demand curve moves from left to right. That means that in some special cases, consumers purchase more even when the price of the commodity is going up. As Salvatore (2008) observes, these instances include times of war, speculation, ignorance effect, demonstration effect, Geffen paradox, depression, and when dealing with the necessities of life. When it comes to necessities of life like food, clothing, and shelter, the law of demand does not hold. For example, even when the price of bread increases, the quantity demanded does not reduce. When the price of essential goods increases, consumers maintain the quantities, but they cut the budgets for luxury goods and services to cover the increase in price.
The law of demand is used to explain consumer buying habits and consumer behavior. For example, economics applies the law to explain how consumers make a choice of when, how much, and where to buy. According to Salvatore (2008), the price that a business sets for a particular product have a significant effect on how buyers behave. For example, if the consumers believe that a particular organization is charging a lower price compared to the competitors, it is likely to make high sales. However, if consumers believe that the business is charging a higher price compared to others in the market, even the existing customers are likely to disappear. Price-conscious consumers are always alert, looking for lower prices for commodities. A slight decrease in price causes a major boost in sales where most of the consumers are price-sensitive. Where many consumers consist of middle-income earners and the rich, charging lower prices could spark suspicion that the product is of lower quality. Businesses should study the market in which they operate before setting the initial prices for commodities. Price research is recommended before releasing the price since making a change thereafter is considered risky. Businesses need to exercise caution when setting the initial price to settle for a price that the consumers are comfortable with. It is also important to consider the right price that guarantees the business a profit that is capable of fulfilling its goals.
Salvatore, D. (2008). Microeconomics: theory and applications. OUP Catalogue