Topic: HOW DOES THE PRICE AFFECT THE QUANTITY DEMAND AND QUANTITY

SUPPLY?

I. Overview

Price go by many names. The price of a worker is wages, income taxes are the price way

pay for the privilege of making money. In economic theory, prices policy tends to be relegated to

a secondary role and attention is devoted to other dimensions of competitive strategy. Price plays

a central role in economy as a whole because it balance the demand and supply. The price has a

direct impact on company profit because it can influence how consumers perceive and how

prospective seller attempts to optimizing return.

Supply and demand is perhaps one of the most fundamental concepts of economics and it is

the backbone of a market economy. Demand refers to how much (quantity) of a product or

service is desired by buyers. The quantity demanded is the amount of a product people are

willing to buy at a certain price; the relationship between price and quantity demanded is known

as the demand relationship. An increase in demand is illustrated in a graph by a rightward shift in

the demand curve.

The Law of Demand:

When the price goes down, the quantity consumers buy will increase. The reasons are:

1. Substitution Effect: changes in price motivates consumers to buy relatively cheaper

substitutes goods
2. Income Effect: changes in price affect the purchasing power of consumers income
3. The Law of Diminishing Marginal Utility: decreasing additional satisfaction

Supply represents how much the market can offer. The quantity supplied refers to the amount of

a certain good producers are willing to supply when receiving a certain price. The correlation
between price and how much of a good or service is supplied to the market is known as the

supply relationship. Price, therefore, is a reflection of supply and demand.

The Law of Supply:

When the price goes up, the quantity producers make will increase. 5 Shifters of Supply:

1. Price of Resources
2. Number of Producers
3. Technology
4. Taxes and Subsidies

Demand and supply provide an analytical framework for the analysis of the behavior of buyers

and sellers in the markets. Demand shows how buyers respond to changes in price and other

variables that determine quantities buyers are willing and able to purchase. Supply shows how

sellers respond to changes in price and other variables that determine quantities offered for sale.

II. Analysis

In almost all cases, consumer choices are driven by prices. As price goes up, the quantity

that consumers demand goes down. This correlation between the prices of goods and the

willingness to make purchases is represented clearly by the generation of a demand, which

shows exactly how much of a good consumers will purchase at a given price is defining of

consumer choice theory. When the price of goods changes, some people will look for a

substitution product which has the lower price. There are some effect of the changes of price: the

substitution effect and income effect. If the income is increasing the purchasing power of the

consumer may increase also. For most businesses, the main effect of changes in price is on their

operating cost. For example the manufacturers, if they have to produce many products they have

to buy many materials also to match the target quota. The manufacturer does not have any

control in the price of raw materials so they have to adjust by giving a right price for their

product.
 A. If the market price of a product decreases, then the quantity demanded increases, and vice

versa. For example,

PRICE QUANTITY DEMANDED

$5 10
$4 20
$3 30
$2 50
$1 80

Based on the table above, we can see that when the price of milk decreases then more people will

purchase milk. The higher the price of milk then lesser people will purchase milk. Price really

matter as far as the quantity demand concern because the lower the price the purchasing power of

the people will increase. Some people also will buy a substitution for milk.

In the view of the management, they might decrease the price if the total revenue is greater than

the total cost. But if the product is not doing well in the market, the management may also

decrease the price by discounting or promotion (bundles). If that is the case, the management

should take the risk and make strategies in order to still gain profits.

B. If the market price of a product increases, then the quantity supplied increases, and vice

versa. For example,

PRICE QUANTITY SUPPLY

$5 50
$4 40
$3 30
$2 20
$1 10
Based on the table above, we can see that when the price of milk increases then the quantity

supply will also increases. The higher the price of the milk the producer will produce more

supply because it will help the producer gain profits.

On the part of the firms, it is only price that brings about revenue. Price is one of the major

determinants of buying of a product or services. A mistake in pricing decision may lead some

firms to close due to inability to have a good return or to compete.

III. Summary and Conclusion

Price is a fundamental element in determining profits, and thus conditions the evolution of a

company. As crazy as it seems, many entrepreneurs work for years to release a new product and

then fix it a price in a few hours during a meeting. Obviously, decisions regarding price shouldnt

be the last decisions you make, since a products price can be a vital factor in its reception by

clients. It can affect how much you will sell, how much cash flow the company will have or the

decision of competitors to enter or not the market. A common mistake by new entrepreneurs is

the important devaluation of their products because they are afraid of losing sales. However, a

low price can affect the credibility of a product, and is not always a judicious pricing strategy.

Another common mistake is to decide the price only on the costs of production.

Types of Pricing Objectives:

Profit, Satisfactory profit levels vs. profit maximization.

Market share, Pricing objectives used to increase or maintain market share.

 Cash flow, recover cash as fast as possible, especially with products with short life

cycles.

Status Quo, maintain market share, meeting competitors prices, achieving price

stability or maintaining public image.

Survival, accept short term losses necessary for survival.

Here are some examples of pricing strategies:

Monopoly pricing: High price for a unique product.

Breakthrough pricing: Low price for acquiring market shares with a new product.

Hook pricing: Low price (including at cost or loss) for attracting clients, with the goal

of having them buy other products to generate profit.

Captive pricing: Low price in order to sell accessories and additional related services at

an increased price.

Simplified pricing: Everything for $1.

Package prices: Including a product that doesnt sell well with one that does, and

selling the two as a package.

Discounts: Decrease the price with: 1) prompt payment, 2) volume, 3) time, 4) client

loyalty.

Flexible pricing: Different prices according to location, target segment or time.

Psychological pricing: Pricing an item for example at $19.99.

 Pricing also has to be consistent with the other elements of the marketing mix, since it

contributes to the perception of a product or service by customers. Setting a price that is too high

or too low will - at best - limit the business growth. At worst, it could cause serious problems for

sales and cash flow. So pricing is important. The bad news for entrepreneurs is that pricing is a

really tough to get right. There are so many factors to consider, and much uncertainty about

whether a price change will have the desired effect. The law of demand states that, for nearly all

products, the higher the price the lower the demand. In other words, sales will fall if prices are

put up. However higher prices can also mean higher profits.