Following the decrease in the price of a good, there is an increase in the quantity demanded by the consumer due to the substitution effect. However, in such a case, the income effect is opposite (Krugman and Wells
While lower savings rate causes higher consumption, resulting in higher output. The reason why savings rate can either reduce or increase output is due to the reason that it is the quantity of money separated from the disposable personal income. Disposable personal income is the money consumers have to buy goods and services. When there is a high savings rate, more money is deducted from the disposable personal income, resulting in less money for the consumption of goods and services and decreasing output. A lower savings rate, on the other hand, would result in higher amount of money for consumption than if the savings rate had been higher, causing a higher
One of the most important concepts of economics is supply and demand, which is the chief support of a market economy. The relationship between these two factors assists in outline the allocation of resources in the most effective way possible. The demand of a product or service represents the quantity desired by buyers. In other words, demand is the quantity of a product or service that people are keen to purchase at a certain price. The law of demand affirm that, if all other factors don’t alter, the higher the price of a product, the less buyers will demand it.
In the short-run, if firms are making losses, i.e. price is less than the average cost, firms will have reason to exit from the market. The number of products decreases reducing the range of choice of consumers. The demand will increase shifting the demand curve of the remaining firms to the right. This will raise the profits of the firms remaining in the market.
Price elasticity is defined in our text as the change in relationship between a change in the quantity demanded and price. When price elasticity is greater than 1, it’s considered “somewhat elastic” so that when the price increases the revenue decreases. This is due to the quantity being changed so significantly it results in a lost in revenue. In a short period of time, this elasticity may not be detrimental but a wide market change could drive away customers and hurt the company. Cross price elasticity is a measure of changes in quantity demands.
• Price of complement goods: an increase in the price of a good that complements another will decrease quantity demanded. The opposite will occur with a decrease in price. • Expected future prices: if you expect future prices to increase you will buy more goods now, increasing quantity demanded. The opposite will occur if you expect a decrease in future prices. • Expected future income: if you expect your future income to increase, you will purchase more now, increasing quantity demanded.
Or, Profit will equal (Price minus Average Total Cost) multiplied by Quantity. If the Average Total Cost is larger than the price than the firm will face either raising price or with a short-term profit loss-shutdown. If profit loss is in effect with the firms long-run Average Total Cost then the firm will have to cut their losses and exit the market. (Mankiw) One reason why most firms did better than others is because of their Average Total Cost being lower than the price. They will be able to make the profit that is needed for the firm to survive.
Price Elasticity The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied.
• A rise in the price level reduces the real value of people’s income and wealth and hence decreases their ability to consume. • Higher prices increase people’s and firms’ demand to hold money for transactions purposes. This increase in the transactions demand for money is likely to raise the rate of interest and thereby reduce demand for consumer goods (consumption) and demand for capital goods (investment). • An increase in the general price level will make domestic goods and services less competitive against foreign goods and services. This will reduce demand for domestic products from both domestic and foreign consumers.
Price of the Product - This factor is so important to be considered in the projection of demand because as the law of demand states: “As the price of the product increases, the demand for the product will decrease and vice versa.” Generally, people are price-conscious; they want services with low prices but with high quality or those that will surely satisfy their needs. For instance, if the prices of services increase, there