The Role of Supply and Demand in Choosing Substitute Goods

The Role of Supply and Demand in Choosing Substitute Goods

Kakarot (2014) avers that the law of demand shows the relationship between demand and price, and it arises from the combination of a finite budget and marginal utility. In some cases, I have had to cut expenditure on some goods to spend on other, more affordable goods, depending on my income. However, when the price falls, I still pay the same amount and buy more of the same product I had avoided earlier. The tendency to adjust demand depending on one’s disposable income is referred to as the income effect.

However, sometimes the decision to buy is not based on conscious calculations.  Some cultural norms drive people to buy cheap goods and services naturally, a practice called instinctive buying (Kakarot, 2014). Instinctive buying may be used to the disadvantage of the buyer when traders apply differential pricing. Differential pricing is based on the market demographics.

On the other hand, the law of supply shows the relationship between price and supply. As the prices of goods and services rise, their supply also rises. However, there are other factors beyond price that affect supply. That means having money does not necessarily mean one will access the goods and services they need.

According to Benetti, Nadal & Salas (2004), other than price, another factor that affects supply is the anticipation of future price changes. It is common for oil dealers to hoard petroleum products when they expect a future price hike. Once there is a shortage, traders willing to supply in the current market conditions increase the price.

One of the responses to a price increment is to buy less. In some cases, the buying decision is postponed anticipating the price to drop. Also, going for substitute and alternate goods is an option.

References

Benetti, C., Nadal, A., & Salas, C. (2004). The law of supply and demand in the proof of the existence of general competitive equilibrium (pp. 84-101). Routledge.

Kakarot-Handtke, E. (2014). The Law of Supply and Demand: Here it is Finally. Available at      SSRN 2481840.

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area, write 200–250 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions with your classmates. Be substantive and clear, and use examples to reinforce your ideas.

The Role of Supply and Demand in Choosing Substitute Goods

For this Discussion Board, please complete the following:

The laws of supply and demand are both important to your decision-making. These laws determine how much something costs, whether you can afford it, and how much is available on the market. Sometimes prices are not what we want them to be. You might choose to purchase a different product or service. This is known as buying a substitute good. Substitute goods replace what you most want to buy but somewhat satisfy the same purpose.

Please watch the following video to review supply and demand:

What is Supply and Demand?

Discuss the following:

How has the law of demand impacted your life?
For example, have prices increased or decreased, making the quantity you purchase more or less?
When prices increase, did you choose to purchase a substitute good?
How has the law of supply impacted your life?
For example, has there ever been a limited amount of something you wanted to buy?
When the amount was limited, how did the price change?
Did the price change influence your buying decision?