The relationship between demand and price

The relationship between demand and price: the law of demand is a general relationship between price and consumption: when the price of a good rises, the quality demanded will fall. The quality of the good demanded per period of time will fall as price rises and will rise as price falls, other things being equal. There are two reasons for this law: Firstly, people will feel poorer, the purchasing power. This is called the income effect of a price rise. And the second, the good will now be dearer relative to other goods. This is called the substitution effect of a price rise. Similarly, when the price of a good falls, the quantity demanded will rise. For example, if the price of coffe rises, we will probably drink more tea, cocoa, fruit juices … Demand curve is a graph showing the relationship between this price of a good and the quantity of the good demand over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis. The demand curve show that the lower the price of a product the more quantity other determinants will be demanded: Firstly, price is not the only factor that determines how much of the good people will buy, Demand is also affected by the following: tastes, the number and price of substitute goods, the number and price of complementary goods, income, distribution of income, expectations of future price changes. Movements along and shifts in the demand curve. A demand curve is constructed on the assumption that ‘other thing remains equal’. One of these other determinants does change, causes demand to rise, the whole curve will shift to the right, this shows that at each price.

Introduction

Demand is very important for becoming a successful businessman. Because we have to know what determinants effects customers to buy good. And then we can choose a right way to sell goods. The demand and price, we will learn about the law of the demand and two reasons for it. First is Income effect, second is Substitution effect. Second, the demand curve will be show by a graph. It is the relationship between the price of the good and the quantity of the good demand over a given time period. Third, other determinants of demand have 6 factors: tastes, the number and price of substitute goods, the number of complementary goods, income, distribution of income, expectations of future price changes. They determine how much of the good people will buy. Forth, movements along and shifts in the demand curve.

The relationship between demand and price Top of Form

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The market demand described amount of goods or services that consumers will buy at all different prices in a particular time. In conditions, the other factors do not change.

The consumption of a product often depends on factors, such as its main rates, income, hobbies or tastes of consumers, the prices of goods and the scale of consumption market, the prices expected in future of products.

The quantity of demand

The quantity of the good or service is the amount that customer plan to buy during a particular time period, and at a particular price.

The law of demand

When we introduced the concept of demand of products, we just review the relationship between price and consumption. This relationship is known as the law of demand, when the price of goods rise, the quantity demand will go down. If the price of goods decreased, the quantity demand will go up.

For example:

Description the amount of VCD was sold in the city for a year.

Price Demand A Demand B Total market demand

(VND/each)

50 0 2 7000

40 3 6 14000

30 5 8 21000

20 7 10 28000

10 9 14 35000

In table, the price of VCD is plotted on the vertical axis; the quantity demand is plotted on the horizontal axis, we have the market demand curve of VCD for a year. The curve usually is slipping, because the numbers of price and quantity demanded have opposite relationship. (Economic university’s book )

The higher price of a good, the smaller is the quantity demanded; and the lower price of a good, the larger is the quantity demanded.

There are two reasons for the law of demand:

The income effect

The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change. ( John Sloman)

When the incomes of consumers rise, they will be willing to pay more for buying goods and services. Often they can buy more goods and services with higher price and quality than before. For the consumers have lower income, they will not be able to buy so many products with their money. This is called the income effect of a price.

For example: iPhone in real Vietnamese market, for the people, who have a higher income. When they want to buy a product, which they like they will be willing to buy it with every level of price. An average day about 6 guests in question and two people decide to buy this product. Despite the high price is “excessively”. But the company do not provide these goods to any buyer. But for the people, who have lower income. They do not have enough money to buy iPhone. They will choice to wait unstill the price is decrease.

The substitution effect

A substitution is a good that can be used in place of another good. (John Sloman)

When the price of a product rise, the quantity demanded will fall. People do not want to buy more, and they will switch away from consuming alternative goods.

For example: In Vietnam, Viettel and VN mobiphone are selling the iPhone with a 2 or 3 years contract. They have two kind of iPhone: the new one is Iphone 4 and the old one is iPhone 3GS, so for the knowledgeable about iPhone products, they will chose to buy the iPhone 3GS with the 3 years contract because the price of this line is cheaper the package of Iphone 4 with contract. ( in Vietnamese newspaper).

The Demand Curve

In economic, a demand curve is a graphical or mathematical diagram that shows the relationship between the price and quantity of a product that consumers are willing to buy. This relationship is inverse of each other because all of us know if the price gets higher, people want less of a particular product. This inverse relationship is almost always can found in any of testing and measuring the supply and demand of certain products of some companies in a competitive market. They draw this graphical over time because the demand curve help the businesses in determining if a certain product is actually profitable at the pricing point on the curve where it is in demand. All the time in a normal graphical, the demand curve interacts with a supply curve on the production possibility, depicting the relationship between market supply and market demand. When demand curve and supply curve cross, the market price is said to be at equilibrium. (Robert Schenk n.d.)

To draw a graphical of the demand curve, beginning with two perpendicular lines forming a right angle. The vertical line or we called the y­-axis represents “price”; and the horizontal line or we called the x-axis represents the “quantity demanded”. Price increments move up along the outside of the y-axis with the highest price nearest the top. Quantity increments move from left to right just below the x-axis line with the lowest figure nearest to the 90° point of the angle. The demand curve normally slopes downward from left to right. In doing so, the demand curve reflects incremental changes of higher quantity demanded at lower prices. Economists often make use of the demand curve to calculate and project the demand and pricing for capital goods, services, labor, as well as many other economic variables.

There are so many ways to express the relationship between price and the quantity that people will buy. In the mathematically, we can say that quantity demanded is a function of price. In another way, one more easily and elementary way to capture the relationship is in the form of a table. The numbers in the form of table are what one expects in a demand curve: as price goes up, the amount people are willing to buy decreases. For example, we will see this happen on the one of the popular product in the world that is iPhone form the Apple Company. So we just imagine that we have 100 of people want to buy this iphone. At the beginning apple sell this good at 1000 us dollar so everybody think the price is still so expensive, so only 40 peoples paid for this price to buy it. But after that apple reduced this price to 800 us dollar so now there have 70 peoples to buy this good. After that apple sells this product only 400 us dollar and now all of them accepted to pay this price. So we can easily to see there will have more high quantity demanded if the product at the lower prices. There are more people want to pay for a good product at a cheap prices.

A Demand Curve

Price of

iPhone

Number of iPhone

People Want to Buy

$400

100

$600

90

$800

70

$1000

40

The same information can also be plotted on a graph, where it will look like the graph below.

For example: iPhone in the real Vietnamese market, according to those knowledgeable about Apple products, for the personal who have high income, they will be willing to spend more $2000 for this property and equipment soon hottest thing in 2010 is not surprising. But until now the price of new iphone 4 is decreasing a lot, just only around $1000, so many people come to the store everyday for asking and already can spend money for this price. Many store at Vietnam said that they do not have enough this good to sell out. ( in Vietnamese newspapers )

Determinants of Demand

The determinants of demand are factors that affect to the increase or decrease of demand of goods. It is also known as demand shifters.

1.) Tastes or preferences of consumers: the tastes are certain psychological reasons for liking or disliking a particular good. If the taste of a good is higher, the demand of this good will increases. In contrast, a decrease in taste of a good will decrease its demand. According to essentials of economics book, the tastes of products are affected by advertising, by fashion, by observing other consumers, by considerations of health and by the experiences from consuming the good on previous occasions. For example, the demand of red wine increase when the TV show reported that drinking red wine every day will lowers cholesterol and lowers the risk of heart attack.

The relationship between taste of consumers and demand of goods:

When the tastes of a product increase, the good’s demand also increase.

When the tastes of a product decrease, the good’s demand also decrease.

2.) Number of consumers in the market: If the consumers increase, the demand of product is also increase. On the other hand, fewer consumers will decrease the demand of product. For example, the demand of sweater increase when winter is coming because of the increasing of consumer of this good

3.) The incomes of consumers: is one of the factors that affect the demand for a given product. The goods that people will buy more when their income rise is called normal goods (or superior goods). In contrast, the goods that people are less likely to buy when their income rise is called inferior goods. One example of inferior goods might be ridding the bus. When income rises, people decrease the demand of using bus and they are more likely to own a motorbike.

The relationship between the Superior goods and the income of consumers:

· When the income of consumers increases, a superior good’s demand also increases

· When the income of consumers decreases, a superior good’s demand also decreases

The relationship between the Inferior Goods and the income of consumers

· When the income of consumers increases, an inferior good’s demand also decreases

· When the income of consumers decreases, an inferior good’s demand also increases

4.) The number and price of complementary goods: the complement goods are those that are consumed together with one you want to buy such as cars and petrol, shoes and polish, or home and furniture. What happen with the demand of cars if the price of petrol rises? The answer is that it will be fall. When the price of petrol rises, people are less likely to buy cars. Therefore, the our relationship is: if the price of the complement rises (falls), the demand of the product falls (or rises)..

5) The number and price of substitute goods: the substitute goods are those which consumers switch to buy more than the other goods which increase its price. For example, the demand for Nike’s goods will depend on the price of Adidas goods. If Nike’s goods go up in price, the demand for Adidas goods will rise.

6) Consumer expectation about the future prices changes: it is the people’s thinking about the fluctuation of the price of the goods. For examples, if the land’s prices are going to rise in the future, they are likely to buy more land now before the prices do go up

Determinants of iPhone prices

How demand effect to Iphone price

iPhone prices are determined by demand. If demand rises (i.e. shift to the right), the equilibrium price of I phone will rise or the equilibrium price of iPhone will fall if demand rises. So why does iPhone price fluctuate differently in the world. The answer lies in changes in the demand for iPhone. Here are some examples of various factors that affect the demand of iPhone.

Tastes: The tastes of iPhone are affected by fashion and high quality of technology. First, iPhone is designed modern and beautiful outside that attract consumers shift to buy it. Besides that, it also own one of the modest technology in mobile phones nowadays that help consumers combine may options in one which is faster and more convenient.

For Example: in any shopping website or news website we can easily to see this good product, iPhone is the most of a symbol of the popular phone in the world. In another way, some games show on television or internets have the best prize for whom win the game and that prize will be an iPhone. There are so many ways for every people in the world know about the iPhone by the marketing and that is why when one people said iPhone and any people in there know what that is. Most of people, who like the smart phone, really want to get one for them soon and do not care it is expansive or not… because they think this phone can do more thing, not just as a normal phone.

Number and price of complementary goods: As you know, iPhone has a lot of competitions in market and the most competitive of iPhone are HTC and BlackBerry. The demand of iPhone has decreased many times because of the introduction of new line of HTC and BlackBerry phones so that lead iPhone’s price goes down. Besides that, because the HTC and Blackberry mobile phone is cheaper than iPhone. So for the buyers who want to buy the smart phone, they will have so many choice forms other company’s phone.

Movements along and shifts in the demand curve:

A deand curve is constructed on the assumpion that ‘other things remain equal.

When one of these other determinants does change? The answer is that we have to construct a whole new demand curve:the curve shifts. If a change in one of the other determainants causes demand to rise-say, income rises- the whole curve will shift to the right. This shows that at each price, more will be demanded than before.

Example:when VN have H5N1 Epidemic diseases.Everyone don’t buy chicken meat anymore and they change to pork.so demand of pork will go up and quantity will increase too.

Conclusion

Analyzing demand is a part of business planning, every company have to know about the number of quantity to set the price rise that compete with competitor in the market. The Apple Company has a lot of products which need to be analyzed for different market, help Apple Company know how many products to produce and set suitable prices.