Supply and Demand as a Fundamental Price Determination Model - Assignment Example

Economics Introduction Supply and demand is a fundamental price determination model in economics that help marketers establish prices for their products and services. The model posits that whenever the demand for a particular product is higher than the demand, the price of the commodity is likely to lower in order to attract more consumers. However, when the demand for the same product rises higher than the supply, the price of the product definitely rises as marketers make more profits. The model thus implies that any market factor that affects either the supply or demand of a product will definitely affect the price of the same (Ireland, 2008). Marketers are therefore always wary of any factor that may affect either of the two in order to customize the production and delivery of their products and services in order to prevent any unnecessary loses. Product X and Y alongside are substitute products. This implies that a costumer can opt for either of the two. As competing products, the marketers for the two products must therefore monitor the actions of each other in order to maintain their market shares. Substitution products are those that a consumer can use either. A shopper, who buys a brand of margarine, may not purchase butter since the two products perform the same function. However, the two enjoy specific market shares that have successfully sustained their profitability thus far. Marketers for either product must monitor the activities of the other since an increase in the other’s market share definitely influences the other’s market share. Any factor that affects the market of product Y will result in either a positive or a negative effect on product X depending on the magnitude of the effect on the previous product. Additional factors that affect the purchase of a product include tastes, preferences and budgets of the potential customers. An effective marketer determines the prevalence of such factors on a product before introducing a product since such factors will affect the performance of the product. After considering the effects of such factors and determining the appropriate market share of a product, a marketer must therefore carry out optimal production and stay wary of the performance of the other products since a change in his or her production may increase the other product’s market share (Kent & Tara, 2011). Such factors as a ridiculous increase in the price of a product may minimize the market share of a product by compelling consumers to purchase its substitute regardless of their tastes and preferences. Doubling the price of product X will definitely increase the demand for product Y. in fact; the demand for product Y is likely to double a feature that is likely to double the products market share. Price is one of the most essential elements in the marketing mix, an economic concept that explains the behavior of both consumers and marketers. Consumers consider the price of a product before making the decision to either purchase a product or not. Marketers on the other hand use the price to establish their target market and to ensure that they remain profitable. Substitution products will always have different prices despite the fact that they all promise the same satisfaction (Blackshaw, 2008). The price difference thus becomes as a marketing technique that marketers use to distinguish their target market. Some expensive products claim to have better qualities than others do while cheaper products target the poor and the middle class most of who seek the basic in either a product or a service. However, after the determination of the price of a product consumers become accustomed to the same thereby appreciating the values that the products offer despite the varying prices. An unprecedented doubling of the price of product X will definitely cut the products market share by half despite the quality that the new prices may promise. The situation of product X worsens when the price of a substitute, product Y remains constant. In case of inflation, consumers expect the prices of all products to increase equally. This validates the claim that doubling the price of product X will definitely increase the product Y’s market share. The fact that product Y will offer the consumers the same satisfaction that product X did in the past will therefore minimize product X market while at the same time increasing product Y’s market share. at the end of the price implementation duration, the market share of product Y will have doubled depending on the previous market share controlled by product X. in some cases, product Y may become a complete monopoly in the market thereby succeeding in eliminating product X. Shift in demand curve The change in the price of product X will influence the market to behave in a particular manner. As explained earlier, the price is an element of the marketing mix, as such, the doubling of the price of product X will increase the demand for product Y a process that will facilitate a major marketing plan as consumers share the price changes among themselves. As product Y enjoys the increased demand, so will the product enjoy increased marketing as the consumers clamber for the cheaper product. The increased demand for the products will help develop the notion that product Y is cheaper among the consumers. Marketing refers to the management function mandated with the determination, anticipation and satisfaction of the customer demands. Customers want affordable products; doubling the price of product X will render such a product unaffordable thereby increasing the demand for product Y that remains affordable for most consumers. When the disparity between the prices of the two products will result in the two products develop their own market niches. The niche is likely to remain as such for a period before the price of product Y doubles. At the time the price of product Y doubles as well, the product shall have established and increased the size of its niche. When its price finally doubles, the previous disparity had developed a large market share a feature that will assure the product with increased marketing thus market awareness (Kotler & Kevin, 2010). When its price doubles later, the product is likely to enjoy a larger market share as the consumers come to terms with its own price increase. Product Y will enjoy an increased market share as the consumers register the increase in its price. By then, the reputation of product X will remain negative a feature that shall safeguard the market share for product Y. however, as consumers continued to shop and register the change in the price of product Y as well, the market will begin becoming even as the consumer behavior settle back to their former state. Through continued shopping, consumers will continue to acknowledge the new prices thereby realizing that the marketers of product X were just being smart and acknowledging the change in inflation thereby doubling their prices earlier. This implies that the demand for the two products will pacify as the market share that had existed before product X doubled its price returns. However, the previous market share may not return perfectly without product X carrying out extensive marketing in order to win its previous market share. The product will require extensive advertising in order to educate the public that the price increase was a necessity. Graph The graph above portrays the change in the market shares for the two products. The product remains a large market share owing to the effects of its lower prices before it eventually doubled its prices. However, the demand for product Y will begin diminishing as the consumers begin realizing the essence of the price increase especially after the price of product Y also increases (Kotler & Kevin, 2010). However, the large market share diminishes progressively as the graph portrays. This represents the consumer behavior as they register the essence of price doubling. This occurs soon after the price of product Y doubles. At the beginning, the two product had their actual market shares since the case had considered all other factors that affect demand and supply. Among the factor that influences the market share of a product are the income levels of the consumers, tastes, preferences and the consumer expectations among many others. The case had considered this thereby providing the two products with their appropriate and realistic market shares. In retrospect, price is a vital element in marketing that influences consumer behavior. While tastes, preference and income among many others may equally influence the consumers’ choices, the price of the products is a vital feature that may compel most consumers to overlook other factors when making choices. This applies in the case alongside; a hundred percent increase in the price of a product is unprecedented and will definitely influence the behavior of consumers. The situation becomes worse when a product has a substitute, as is the case above. The consumers resort to the cheaper product thereby shunning the exorbitant product. The concept thus influences the change in behavior patterns as discussed above. References Alexander, B. (2010). International Financial Reporting and Analysis (5th edition). Oxford: Oxford university press, 2010. Print. Blackshaw, P. (2008). Satisfied Customers Tell Three Friends, Angry Customers Tell 3,000: Running a Business in Todays Consumer Driven World. New York: Doubleday. Ireland, H. (2008). Understanding Business Strategy. New York: Free Press. Kent, P. & Tara, C. (2011). Poor Richards Internet Marketing and Promotions: How to Promote Yourself, Your Business, Your Ideas Online. Lakewood, CO: Top Floor Pub. Kotler, P. & Kevin, K. (2010). Marketing Management. Upper Saddle River: Pearson Prentice Hall. Read More