Non-price changes

Examples of Non-price changes in the following topics:

• Changes in Supply and Shifts in the Supply Curve

  • The supply curve depicts the supplier's positive relationship between price and quantity.
  • If the price of the good or service changes, all else held constant such as price of substitutes, the supplier will adjust the quantity supplied to the level that is consistent with its willingness to accept the prevailing price.
  • The change in price will result in a movement along the supply curve, called a change in quantity supplied, but not a shift in the supply curve.
  • Changes in supply are due to non-price changes.
  • A shift in supply from S1 to S2 affects the equilibrium point, and could be caused by shocks such as changes in consumer preferences or technological improvements.

• Shifts in the Money Demand Curve

  • A shift in the money demand curve occurs when there is a change in any non-price determinant of demand, resulting in a new demand curve.
  • The interest rate is the price of money.
  • The shift of the money demand curve occurs when there is a change in any non-price determinant of demand, resulting in a new demand curve.
  • Non-price determinants are changes cause demand to change even if prices remain the same.
  • Factors that influence prices include:

• The Demand Curve

  • Thus, any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand.
  • The line on the graph indicates the way in which the change in price brought about a change in demand.
  • The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve.
  • Non-price determinants of demand are those things that cause demand to change even if prices remain the same—in other words, changes that might cause a consumer to buy more or less of a good even if the good's price remained unchanged.
  • Thus, any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand.

• Determinants of Price Elasticity of Demand

  • The price elasticity of demand (PED) is a measure of how much the quantity demanded changes with a change in price.
  • When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price .
  • Duration of price change: For non-durable goods, elasticity tends to be greater over the long-run than the short-run.
  • In the short-term it may be difficult for consumers to find substitutes in response to a price change, but, over a longer time period, consumers can adjust their behavior.
  • Brand loyalty: An attachment to a certain brand (either out of tradition or because of proprietary barriers) can override sensitivity to price changes, resulting in more inelastic demand.

• Marginal Analysis

  • In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output is known as marginal-cost pricing.
  • If, for example, an item has a marginal cost of $1.00 and a normal selling price of $2.00 the firm selling the item might wish to lower the price to $1.10 if demand has waned.
  • If the firm is operating in a non-competitive market, changes would have to be made to the diagram.
  • In a non-competitive environment, more complicated profit maximization solutions involve the use of game theory.
  • Identify the characteristics of a marginal price analysis relative to pricing decision making

• Determinants of Supply

  • Supply levels are determined by price, which increases or decreases supply along the price curve, and non-price factors, which shifts the entire curve.
  • Good's own price: An increase in price will induce an increase in the quantity supplied.
  • Suppliers will change their production levels along the supply curve in response to a price change, so that their production level is equal to demand.
  • If the price of a good changes, there will be movement along the supply curve.
  • However, the supply curve itself may shift outward or inward in response to non-price related factors that affect the supply of a good, such as technological advances or increased cost of materials.

• Changes in Demand and Shifts in the Demand Curve

  • Movements along the demand curve are due to a change in the price of a good, holding constant other variables, such as the price of a substitute.
  • If the price of a good or service changes the consumer will adjust the quantity demanded based on the preferences, income and prices of other factors embedded within a given curve for the time period under consideration.
  • Shifts in the demand curve are related to non-price events that include income, preferences and the price of substitutes and complements.
  • A change in preferences could result in an increase (outward shift) or decrease (inward shift) in the quantity level desired for a specific price; while a change in the price of a substitute, could result in an outward shift if the price of the substitute increases and an inward shift if the substitute's price decreases.
  • Movements along a demand curve are related to a change in price, resulting in a change in quantity; shifts is demand (D1 to D2) are specific to changes in income, preferences, availability of substitutes and other factors.

• Duopoly Example

  • The firm determines its rival's output level, evaluates the residual market demand, and then changes its own output level to maximize profits.
  • The result of the firms' strategies is a Nash equilibrium--a pair or strategies where neither firm can increase profits by unilaterally changing the price.
  • However, not colluding and charging the marginal cost, which is the non-cooperative outcome, is the only Nash equilibrium of this model.
  • If capacity and output can be easily changed, Bertrand is generally a better model of duopoly competition.
  • When Firm 2 prices above monopoly price (PM), Firm 1 prices at monopoly level (P1=PM).

• The Law of Demand

  • If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service.
  • The change in price will be reflected as a move along the demand curve.
  • The demand curve will shift, move either inward or outward as a result of non-price factors.
  • A shift in demand can be related to the following factors (non-exhaustive list):
  • The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price.

• Nonprice Competition

  • Non-price competition involves firms distinguishing their products from competing products on the basis of attributes other than price.
  • Since price competition can only go so far, firms often engage in non-price competition.
  • Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price and avoids the risk of a price war.
  • Non-price competition may also promote innovation as firms try to distinguish their product.
  • Although any company can use a non-price competition strategy, it is most common among oligopolies and monopolistic competition, because these firms can be extremely competitive.