RELATIONSHIP BETWEEN PROFIT, PRICE AND DEMAND

What the consumer wants at a certain price is the amount or quantity of the good, or service, called DEMAND. This can vaguely mean that the seller or service provider needs to know the buyer's wishes in advance, in order to prevent losses and unprofitable business, of the products and/or services. If therefore demand is what consumers want at a certain amount, it would be legitimate to conclude that product and service costs have a significant effect on demand. Increase in prices, generally, results in a decrease in demand. This, however, depends on the kind of product or service required by the consumer. For example, a sick patient who depends on a given drug to sustain his life will do whatever it takes to ensure they purchase the drug whether the prices are high or low. Since the patient only requires a given dose for a given time, he will have to purchase the drug when needed and at its cost at that time, whether high or low. A decrease in the prevailing price of the drug might, in this case, not increase demand since the patient will still purchase the same quantity of drug needed for a given time. This brings us to a general agreement that not all the time will drop in prices translate to increase in demand.

The profitability of a business that decreases its price solely depends on whether the demand rises and these two factors are directly proportional. The likelihood of business to gain profits after lowering its prices are high if this move triggers an increase in demand. In cases where prices lower and there is no increase in demand, the business is likely to incur losses while at it.The whole question of whether the drop in prices will increase demand and consequently help a business get profit is fully determined by the type of goods or services in question.

In relation to the type of goods or services, the satisfaction of the consumer will highly affect the demands and supply and this will bring about economic equilibrium, thus drops in price may lead to what is known as joint supply and as a result, increased demand, which also translates to more profits.

COMPARING DIFFERENT TYPES OF GOODS

In comparing different types of goods and the possible implications on the drop of prices, it is important to note that not all goods and services will be affected in the same way if prices were to be dropped at a given time for a given type of consumer. Luxury goods are not as popular as compared to specialty goods and therefore drops on prices in the former might not have the same implication on demand and profitability as compared to the implications of the same to the later type of goods. This is a general view that the principle aforementioned does not apply to all types of goods since the demands vary from the consumer of goods A to the consumer of goods B and so do the prices.

Food is a basic need for human survival and existence. No matter the prices of food in the markets, it will still be purchased and demanded without much demand difference from time to time. However, the same rule does not apply to luxury goods since a human being can make do without luxury and still survive. This can be used to study the pattern in which drops in prices of the two commodities can affect the demand and the profitability of a business. Drop in the prices of foodstuff will lead to an increased demand since it is a basic unit for the survival of man and when it is affordable, human beings are definitely ready to consume as much as they can at a given lower price compared to how they would have consumed the same at a relatively higher price. This thus shows that the general principle applies to this type of commodity. The business is likely to make more profit when it drops its prices since there will be an increased demand for the goods.

On the other hand, luxury goods such as going for family vacations is not basic for human survival good and thus human beings can make do without it. In comparison to food, going for a family vacation is not highly demanded since only a section of a population would demand it whereas food will be demanded by a whole population that makes an ecosystem thus making the demand of food higher than that of a family vacation. The adverse effect on the drops n prices of the luxury good may be experienced when it does not attract higher demand and this automatically leads to the making of losses.

This, however, does not mean that 100% of the time will drop in prices of luxury goods lead to the making of losses. In some cases, there might be an increase in demand from consumers who take advantage of the drops in prices and this happens once in a while thus generating profit to the business. It is important to note that in as much as a number of consumers might decide to take advantage of the drops in prices for luxury goods, not all the times will this happen and therefore the profitability of such is unpredictable as compared to the profitability that comes with the drops in prices of foodstuff.

The general principle does not therefore apply to all the three types of goods and (or) services. A drop in price for a given commodity might attract a higher demand and more profit as compared to another.

FOCUS ON INDUSTRIES AND HOW THE RULE APPLIES

The industry produces goods and there is the cost of production in the process. It is important to notice that what comes to the market will solely depend on what the industry is able to give forth at a given time. What the industry gives forth also depends on the cost incurred during the process of production. The higher the cost of production, the lower the supply and vice versa.

The cost of a given commodity in a market is highly determined by the cost of production of the given good for the sake of profitability. Any rational seller will have to know how much it cost him to avail the good to the market before deciding on the price of the commodity in the market, and this move is very logical for the sake of any business to thrive.

The cost of production of goods vary from one industry to another and this is the reason as to why all commodities in the market do not have the same price across the board. Goods from the same industry might also vary in market prices and this is entirely explained by the cost of production. A good example is in the wood industry. The market price of firewood is slightly lower as compared to that of furniture made out of wood. The two final products of this industry vary in prices not for any other reasons but for the cost of production. A broader look at this will give us an indication that every industry is entitled to have different market prices for their goods and (or) services.

A drop in market price of goods thus does not just come about without proper consideration of the production cost. This means that the drops in prices have to solely depend on the production cost of the product in order to facilitate further production, otherwise, the business is bound to collapse if such considerations are not made.

Industries that do not spend a lot during the production process are at a better position of dropping their market prices as compared to the ones that spend a fortune on production. As earlier agreed, drops in prices will attract increased demand but this does not necessarily mean there will be an increased profitability. The sequence thus goes; drops in prices lead to increase in demand which will further require increased production and cost while at it. The end product of this sequence will automatically be a loss if supply is not restricted or reduced. The drops in prices must therefore, first and foremost, ensure there will be economic equilibrium that does not only satisfy utility but that is also profitable to the owner of the business.

Dropping the price of eggs will bring about profits to the business as compared to drops in the prices of shoes. This is because, on normal grounds, the demand for eggs is higher than that of shoes. In the same line, the production cost of eggs is far much smaller compared to the production cost of shoes.

HOW THE RULE APPLIES TO BOTH THE CONSUMER AND A BUSINESS

The consumer plays a big role in ensuring a business thrives on, and so does the business and its handlers. The rules of increased demands and profits also apply to the consumer since the basic test of a thriving business is found in the satisfaction of the consumer. When a consumer is dissatisfied, the likelihood of having a lower demand is higher whereas when the consumer’s desires are met, there will be a definite increase in demand for the given goods or service. The utility, therefore, is a measure of how good a business can be since every consumer wants something worth their financial power and if that is what the supplier is giving, then the possibility of increased demand is an assurance.

This means that drops in prices do not just attract increased demand unless the consumer is getting value for their money. The supplier of goods and services is therefore required to give the best they can in order to satisfy consumer needs and in cases where there is need for increased demand, drop in prices will call for the same. Increased demand, therefore, comes with the satisfaction of the consumer.

In conclusion, whether a drop in market prices will always increase demand and consequently lead to more profit it depends on very many factors as mentioned in this report.

Bibliography

1 .Avis, J.2009. CIMA Official Learning System Performance Management. Pp.146

2 .Burke, L. and Wilks, C.,2006. Management Accounting Decision Management.pp 127.

3. Gale, D., 1995. The law of supply and demand, Mathematica scandinavica, pp,155-169

4. Harde, W., Hildenbrand, W., and Jerison, M., 1991. Empirical evidence on the law of demand. Econometrica: Journal of the Econometric Society, pp 1525-1549.

5. Just, R.E. and Zilberman, D., 1986. Does the law of supply hold under uncertainty?.The economic journal, 96(382), pp 514-524

.6.Kuhn, H.W.,1956. A note on the law of supply and demand.Mathematicascandinavica, pp. 143-146.

7.Marshall, A., 1920. Principles of economics, an introductory volume. Royal Economic Society(Great Britain)

8.McEachern, W.A. 2013. Economics: A contemporary Introduction.pp.68

9.McEachern W.A. 2013. Macroeconomics: A contemporary Approach. Pp68.

10..Vaigh, B., and Flemming, K.,2016. Introduction to air transport economics: From Theory to Applications.