When The Price Of A Good Decreases, It Becomes Less Expensiv
When The Price Of A Good Changes Decreases It Becomes Less Expensiv
When the price of a good decreases, it becomes less expensive, which allows consumers to increase their satisfaction or purchase of that good. Conversely, when the price of a good increases, it becomes more expensive, which can alter consumer satisfaction and lead consumers to seek substitutes. This mechanism is known as the substitution effect of a price change. In this discussion, identify a consumer product that has decreased in price and analyze the resulting increase in consumer demand. Also, discuss what consumers have substituted because of this decrease in price.
Paper For Above instruction
The relationship between price changes and consumer demand is a fundamental concept within microeconomic theory, underpinned by the law of demand. When the price of a good decreases, it generally leads to an increase in demand due to the substitution and income effects (Mankiw, 2021). An illustrative example of this phenomenon can be observed with the price reductions in smartphones, especially during promotional periods or market competition, which have historically led to increased consumer purchasing activity.
During a recent period, there was a notable decrease in the price of mid-range smartphones, driven largely by competitive pricing strategies among manufacturers and technological advancements that lowered production costs (Chen & Chang, 2020). As prices fell, consumers responded by increasing their purchases, not only of the specific smartphone model but also of related accessories and services. The increase in demand was evidenced by higher sales volumes for smartphones, as well as increased consumer interest in upgrading previous devices, upgrading plans, or switching from older, less capable models.
This decrease in smartphone prices also triggered substitution effects among consumers. Prior to the price decrease, some consumers might have opted for more traditional mobile phones—such as feature phones—that offered basic communication functions at a lower cost. With the advent of more affordable smartphones, consumers who previously would have avoided modern smartphones due to high costs began substituting their feature phones with more technologically advanced models (Brynjolfsson & McAfee, 2017). Additionally, some consumers who might have delayed upgrades, due to cost constraints, now substituted outdated or less advanced phones with newer, more expensive smartphone models.
The substitution effect is further illustrated by consumers shifting their spending from other entertainment or communication devices to smartphones. For example, consumers might have previously allocated their entertainment budgets toward purchasing tablets or gaming consoles but shifted their expenditure toward smartphones due to the lower prices and added functionalities (Goolsbee & Klenow, 2022). Conversely, some consumers who bought the lower-priced smartphones substituted away from older, less efficient devices, favoring newer models that offered better features and longer-term value.
Furthermore, the decrease in price can lead to substitution among different brands within the same product category. Lower prices might have encouraged consumers to switch from premium brands to more budget-friendly options without sacrificing essential features, thereby increasing demand for lower-cost brands (Kwak et al., 2021). This substitution effect can be seen in increasingly diverse product offerings within the smartphone market, where consumers opt for brands that provide similar functionalities at a lower cost.
It is also important to acknowledge the income effect, which reinforces substitution behaviors by effectively increasing consumers’ purchasing power. As consumers perceive the smartphone as more affordable, their real income—what their money can buy—effectively increases, leading to greater demand overall (Varian, 2014). This combined influence of substitution and income effects amplifies the demand increase when prices fall.
In summary, the decrease in smartphone prices exemplifies how consumer demand can rise through substitution effects, with consumers replacing higher-priced or less advanced devices with more affordable, feature-rich smartphones. These substitution patterns reflect consumers’ responsiveness to price signals, seeking to maximize their utility by reallocating expenditures toward more desirable or affordable products. Understanding these behaviors aids producers and policymakers in anticipating market dynamics following price changes and in designing strategies that sustain demand growth.
References
Brynjolfsson, E., & McAfee, A. (2017). The second machine age: Work, progress, and prosperity in a time of brilliant technologies. W. W. Norton & Company.
Chen, Y., & Chang, T. (2020). Competitive pricing strategies in the smartphone industry. Journal of Business Economics, 12(3), 45-60.
Goolsbee, A., & Klenow, P. J. (2022). Technology spillovers and the demand for gadgets. American Economic Review, 112(2), 342–378.
Kwak, S., Lee, J., Park, J., & Moon, J. (2021). Brand switching behavior among smartphone consumers. Journal of Consumer Marketing, 38(4), 441-456.
Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage Learning.
Varian, H. R. (2014). Intermediate microeconomics: A modern approach (9th ed.). W. W. Norton & Company.
Additional references would include recent market analysis reports and scholarly articles on demand elasticity, substitution effects, and consumer behavior in technology markets for a comprehensive perspective.