In this lesson, we'll take a look at how prices may affect decision making in producers and consumers. The lesson will also define key terms and concepts related to how pricing affects producers and consumers.
The Nature of Pricing
When it comes to the business market, prices are everything. Prices are responsible (either partly or fully) for the decisions that producers and consumers make. Can you remember the last time that you visited a business and wanted to make a purchase but decided against it because you thought that the price was too high? Or, how about deciding to make an impulse purchase because you felt as if you were getting a pretty good deal price-wise?
If you experienced either of these scenarios, then you understand that prices have a major effect on producers and consumers and the decisions that they make. Let's take a closer look at just how prices can affect the decision making for producers as well as consumers.
Prices and Producers
Before we delve further into the relationship between prices and producers, it is important that we understand terms that are commonly used. Let's begin with supply. Simply stated, supply can be defined as the numerical quantity of a tangible item that businesses, organizations, and other institutions have for redistribution. On the flip side, demand in this context is the desire of consumers for a specific product.
Prices have an immense affect on the decision making of producers and can be explained by the law of supply. The law of supply states that the quantity of a good increases when the price decreases. The law of supply is a primary example of how pricing can affect decision making with producers. For example, let's assume that you work for a company that produces smartphones. Your company has been made aware that a rival company will be introducing a newer smartphone in three months, which has the same features but at a lower cost.
Your company has chosen to lower the price of their current smartphone along with trying to sell it to other retail stores to try and get ahead of the competition. In anticipation of additional sales from the lowering of prices, there must be additional supplies (or smartphones) purchased.
Price also affects producers because it relates to the cost of materials needed to produce a good. For example, let's say that you are the manufacturer of homemade dolls, and many of your dolls are made from supplies such as yarn and cotton along with other fabrics. If the cost of the supplies is higher to purchase, then it affects your decision making because you must determine how many dolls can be crafted, if any.
Prices and Consumers
As a consumer, most people are concerned with one thing: How expensive or inexpensive a particular item is that is in demand. This is a direct (and obvious) correlation, which is represented again by the graph illustrating the law of supply and demand.
The law of demand states that the quantity of a good decreases as the price for that same good increases. The law of demand and its affect on pricing influences consumers because if (for example) the price of fast food has decreased, then you'd see a decision made by consumers to purchase or demand more fast food.
Prices also affect consumers through the use of purchasing alternative or lower cost items. For example, many stores will have their own generic brand of an item. This item is typically lower in price than their name brand counterparts. Walmart, for example, uses the Equate product line for many of their original products (such as Equate Ibuprofen). In this scenario, lower pricing gives consumers a lower cost option for headache relief as opposed to higher costing name brands.
Let's go over some terms to remember:
- Supplyis the numerical quantity of a tangible item that businesses, organizations, and other institutions have for redistribution to consumers
- Demand is the desire of consumers for a specific product
- The law of supply states that the quantity of a good increases when the price decreases
- The law of demand states that the quantity of a good decreases as the price for that same good increases
Prices have a direct effect on producers and their decision making because when there is a price decrease, producers must increase their supply (which is the law of supply). Prices also affect producers because higher prices of supplies may cause producers to make an executive decision as to whether or not to make more products.
Conversely, prices have a direct effect on consumers because when prices increase, the quantity of a good decreases. Also, prices affect consumer decisions by often providing low-cost, generic alternatives to name brands. This gives consumers purchase options.