Effects of Prices on Producers and Consumers

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  • 0:03 The Nature of Pricing
  • 0:47 Prices and Producers
  • 2:30 Prices and Consumers
  • 3:36 Lesson Summary
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Lesson Transcript
Instructor: LeRon Haire
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.

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