The Impact of Price Drop on the Demand-Free-Samples for Students

Question: If a Business drops its price will it always Increase demand- and will it make Profit? Answer: Introduction: This report has been prepared to analyze the law of demand and supply in context of a product to understand the demand and supply relation. In this report we will, study the impact of price drop on the demand and profit making. Further, this report offers a brief about the profitability and demand of a product due to its high price. Law and Demand supply: The law of demand and supply refers to an economic theory that helps in understanding of relationship between the demand and the supply as well as the effects of price changes on them. Law and demand supply briefs the user about entire relationship between the demand and the supply[1]. Demand Curve: A demand curve is a curve that shows the relationship between price level and the quantity demanded of the product. Its a curve that combines two curves into a single curve i.e. the supply curve and the demand curve. Price drop does not always results in increase demands; it depends from product to product and market situations. As the products can be of various types like general products, necessary products, griffen goods etc. each of these products have different demand curves according to price variations and also market can open or monopolist etc. which also affects the demand curve because in a monopolist market there is only one seller in the market who has complete monopoly on the product and does not have same impact of price drop as in case of open or free market[2]. For example in an open market the demands of a general product increases as: As the above graph states that at price $50 the product demanded are equal to 90 units. Now when the price is decreased to $20 it results in increase in demands of the product by 105 units as shown below. It clearly depicts that the increase in demand by 25 product[4]. But this is possible only in case of general products and open market. There are several exceptions to it, like: Necessary goods: A necessity product is a normal good such as any other regular good. Whenever price of these products falls, demand also falls but the demand rise for a necessity product is quite less than the proportional rise in price. Thus the expenditure proportion on such goods falls with increment in the price. Generally, it refers to goods which are required by the consumer to consume even how high its price is or not. For example Medicines, even if price goes down still the consumer intake will remain same[6]. Griffen Goods: A Giffen good is naturally an inferior good which does not have simple obtainable alternates, as a consequence of which the effect of demand dominates the substitution effect. Giffen goods are relatively rare, to the degree that there is some discussion about their actual subsistence. It refers to inferior goods whose demands increase with increase in demands. Hence, there demand decreases with a price drop. Lowering Prices increase Profits In slow economys, generally everyone assumes that by lowering price one can sell more quantity and also increase their revenues and profits. But this is not always true. The price change policys effectiveness depends on the slope of the demand curve. If the demand curve is perfectly inelastic, then customer wont change their demand even if there is any price drop. On the other hand, the customer changes there demand according to the price if the demand curve is perfectly elastic and lower the price higher is the demand. (Besanko, 2009) Conclusion: This report enlighten the user with the effect of price drop and its effects in various markets and the effect of price drop in profit making for any organization. Bibliography: Hirschey, Mark. Managerial economics. Cengage Learning, 2016. Png, Ivan. Managerial economics. Routledge, 2013. McGuigan, James, R. C. Moyer, and Frederick Harris. Managerial economics: applications, strategies and tactics. Nelson Education, 2013. Webster, Thomas J. Managerial economics. Lexington Books, 2014. Prusty, Sadananda. Managerial economics. PHI Learning Pvt. Ltd., 2010. Boyes, William. Managerial economics: Markets and the firm. Cengage Learning, 2011. Perloff, Jeffrey M. Microeconomics: Theory and applications with calculus. Pearson Higher Ed, 2017. Mark Hirschey. Managerial economics. Cengage Learning, 2016. Thomas J Webster. Managerial economics. Lexington Books, 2014 Jeffrey M Perloff. Microeconomics: Theory and applications with calculus. Pearson Higher Ed, 2017. James McGuigan, Moyer R. C., and Harris Frederick. Managerial economics: applications, strategies and tactics. Nelson Education, 2013. William oyes. Managerial economics: Markets and the firm. Cengage Learning, 2011. Sadananda Prusty. Managerial economics. PHI Learning Pvt. Ltd., 2010. Ivan Png. Managerial economics. Routledge,