The Law of Demand is one of the most significant building blocks of economics. Every time one pulls out a sheet of paper or a notebook to purchase an item, this law is at work. By understanding this law, one clearly comprehends why he or she pays different prices for dissimilar goods. Similarly, for one to run a successful business, knowing the law of demand is inevitable. Therefore, demand is the correlation between the quantity of a product or service purchased by a consumer and the price the seller charges for the product or service.
The law of demand thus states that, with all other elements remaining constant, the quantity of a product reduces as its price drops. In the same fashion, as the commoditys price increases, the quantity purchased declines (Roger, 58). The following simple examples will aid in understanding this concept better. First, when the local Starbucks raises the price of a Caramel Frappuccino mini from $3.75 to $4.00, the quantity of the coffee purchased will decrease. Furthermore, the additional cost may prompt people to make their coffee at home or reduce the number of purchases they make per week. Second, a realtor may have a house in the market for a long time, but once he or she lowers the price, he or she sells it.
Law of Supply
Setting prices for commodities and services is the biggest opportunity, and still the biggest challenge businesses face. While pricing a product or service, it is essential to consider how much customers are willing to pay without under-pricing the good or services. Consequently, pricing is a fundamental element of the Law of Supply. According to Rodger (87), the law of supply states that, with all other factors remaining constant, when the price of a commodity purchased increases, its availability in the market also increases. Furthermore, the primary goal for any business is to make profits. Therefore, a rise in the price of a product or service translates into more money per product. However, significant gains will arise if the number of goods sold is high. With this in mind, suppliers increase the number of goods in the market to make more revenue, which realizes higher profits. Similarly, as the prices drop, the supply also falls.
A good example of the Law of Supply applies to fans of a football team that just won the championship to participate in the Super Bowl. Few weeks before the Championship game, T-shirts bearing the team logo sell at typical prices similar to t-shirts with other logos. However, once the team wins and is heading to the Super Bowl, there is a run for the teams t-shirt. Since suppliers primary goal is to make high profits, they increase the prices of the t-shirts. Nevertheless, fans still buy the commodity regardless of the high prices.
Price Elasticity of Demand
Do consumers purchase more when prices reduce? If the answer is affirmative, then how much more do they buy? An evaluation of a products price elasticity of demand answers these questions. This concept measures the responsiveness of the request at the cost changes of a given commodity. It is the percentage variation in the quantity demanded about one percentage change in the price, once all other factors remain constant. Based on the elasticity of demand, the classification of demand for products can either be perfectly elastic, elastic, inelastic or perfectly inelastic (Rodgers, 59).
Elastic demand refers to a situation whereby the coefficient of price elasticity of demand is greater than one. In other words, demand is actively responsive to variations in price. Perfectly elastic demand is one whereby the coefficient of demand is equal to infinity. In other words, consumers can buy a product at only one price, which is common in highly competitive markets where suppliers lack pricing powers. On the other hand, inelastic demand occurs when the coefficient of price elasticity of demand is less than one translating into an increase in revenue after the change of the market price. While it is perfectly inelastic, the coefficient of price elasticity of demand is equal to zero, which means that demand remains constant even when price changes. Uber Taxis apply dynamic pricing strategy during peak hours, a strategy that takes advantage of low price elasticity of demand. At pick times, demand is weak. Therefore, the firm raises the fare prices on the App to encourage more drivers to do business. Consequently, the supply expands.
Significance to Business
Understanding these principles plays an essential role in improving the performance of business. However, it is crucial to note that, one must know all the laws, and combining them in the market gains the organization a competitive edge. By understanding the law of demand and the law of supply, the company operates at an equilibrium price, where all its products have customers. Therefore, it never lacks stock; neither does it have excess inventory, which can lead to losses. When a company knows about the price elasticity of its products, it gains knowledge on how its customers respond to changes in prices of its commodities (William, 111). Therefore, it can reduce risks and uncertainties because it has adequate information to forecast sales and set prices. In summary, operating at the markets equilibrium price and knowing the behavior of consumers, a business will always make profits and thus perform highly.
Arnold, Roger A. Economics. Melbourne, Vic.: South-Western Cenage Learning, 2014. Print.
Mceachern, William A. Economics: A Contemporary Introduction. Place of publication not identified: Cengage Learning, 2016. Print.
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