Substitute Goods – Essay Sample
Examples of substitutes of bicycle are; vehicles and motorbikes. When the price of bicycle increase or income increases, most people would go for vehicles and motorbikes (which act as substitutes). When a person devotes his income to given commodity, either due to its necessity or luxuries, he/she will spend a lot of money on that good or so the demand would increase (Caldwell, 2003). When a person who was using a fifth of his salary in purchasing clothing decides to use a quarter, the quantity of clothing bought would increase and so the demand. Consumer’s time horizon influences the demand of a good (Morse, 2002). For example suppose a customer has limited amount of money and has food and vehicle as things to be bought, he/she would go for food first. Vehicle will be considered luxury suppose the basic need has not been met. A car can be bought later. A client would make more purchases for urgent good than for luxuries or goods that aren’t presently needed. For a good that is to be purchased in a short time, the demand increases. This will in turn raise the increase in percentage change in demanded quantity. Suppose change in price remain constant, for both goods (urgent and non-urgent), good that are to be purchased in a short time would be elastic and for longer time frame inelastic. The high percentage in demanded quantity (shorter time frame), makes the coefficient to be more than one and the lower percentage change in non-urgent goods makes coefficient to be less than one and so inelastic.
There are numerous factors that determine the prices of good, among are; customer’s time horizon, availability of substitutes, share of customer’s income devoted to a good among others. Many businesses make decision based on the market status referring to the above mentioned factors among others. When a Company realizes that there are many substitutes for their products, they lower prices of those products. This is to enable them have many customers. Customer’s time horizon also affect decision making in that when a company dealing with less urgent (non-basic) goods always lower the prices to attract clients. Commodities purchased in a short time frame always have higher prices due to their necessities. Many customers customer do devote more of their incomes to essential goods and this creases their demands. Basic things are given priorities over non-basic. A company should make decision on the prices depending on the n umber of people that go for that particular good. When few clients are noted, then the prices should be lowered. However, when prices are to be increased, many factors have to be considered; availability of substitutes, price of complementary goods, demand, necessity among others (Morse, 2002).
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