How Does a Change in the Price of a Good Affect Both Consumers & Surplus?
Price is an integral part of the consumer and surplus relationship. Even slight changes in price can motivate or discourage consumers from taking economic action. Furthermore, company inventories are directly affected by the domino effect of customer voting decisions. Many companies compete with a price-centric strategy as its primary competitive advantage because it is so effective with buyers. The cost of goods can also change because of increasing supply costs, which can interfere with discount retail strategies.
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Supply and Demand
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Price can drive demand. The maximum price a buyer will pay for a good represents her demand for it. Low prices make goods more affordable to consumers. Alternatively, higher prices can discourage a purchase as the product must compete with other potential purchases available to the consumer. Additionally, affordable prices can spur demand so much that prices may rise as a result of the decrease in inventory.
Company Inventories
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Inventories and price are also closely related. The lowest price a company is willing to sell a good is its supply cost. Unless, the good was designed to be a loss-leader, where low prices attract customers in hopes that they will purchase other reasonably priced goods. Higher-priced items can adversely affect demand, which can increase company surpluses. Excessive inventories can also inspire discounted prices to increase volume sales.
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Price Strategies
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Customers are influenced by price. Low-cost retail companies, also known as discount retailers are keenly aware of this. These companies create entire corporate strategies around beating competitor prices. Shoppers, in turn, continue the cycle by checking prices with various companies to yield the best deals. Customers are especially price-sensitive during weak economies and may wait to purchase a good until it is “on sale” or discounted.
Supply Costs
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Prices changes are not always welcome. Production costs can sometimes rise because of a myriad of reasons including lack of supply components, increasing fuel costs and labor disputes. Businesses increase product prices to maintain relative profit margins and effectively pass the price increase to the consumers. These forced price changes may sway consumers from purchasing a company’s goods. However, some brand-loyal customers may continue to purchase the goods at the higher price because of other considerations such as quality and availability.
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