Does a Higher Price Attract Higher Demand?

Jackie Phoong Kah Wai (0312734) - Section 9 - First Article

Does a Higher Price Attract Higher Demand?

            Based on the article ‘Does higher price attract higher demand?’ in Economics for Business by Fraser. I and Mc.Graw, I have decided to write on how tastes and preference affects shift in the demand curve and not a move in the demand curve.

Price elasticity of demand graph.

            As economics students, we learnt that there is always a negative relationship between price and quantity demanded. The law of demand states that consumers buy more of a good when the price is lower but less if the price is higher when all other factors remain constant (ceteris paribus). However, there are certain problems that arise when this relationship is strictly adhered to. For example, designer clothes and perfumes would not be purchased if they are priced too low. Does this mean that a positive relationship do exist between price and willingness to demand luxury items? The answer is no, since all products have a negative demand curve even as this seems to be an appealing idea. Even if you are rich, you would not have infinite income to spend as you will still have a budget constraint.

            Assuming you are very rich but with a budget constraint of RM 500 000. Your designer clothes cost RM 250 000 a year, beverages another RM 100 000 and private jet as your transportation another RM 100 000 annually. If your designer decided to increase the price of the clothing to RM 300 000 a year, you are faced with choices to be made as your spending cannot exceed the budget. If you continue to purchase the same amount of designer clothes for RM 300 000 annually, you will have to cut back on the amount of beverages and/or jet usage. Alternatively, you could purchase less of designer clothes amounting to RM 250 000 while maintaining the quantity of beverages and jet usage. Another choice is to reduce all three spending amounting to the budget, perhaps spending only RM 275 000 on designer clothes and the extra RM 25 000 can be reduced from the amount of beverages that you drink and jet flights. 

            From the example above, it is important that we understand that when one product has its price increased, this limits how much money you can spend on all goods and services that you like to consume. You have to make choices and a trade-off is occurred between quantity of designer clothes, beverages or number of flights. If you decrease the quantity of clothes purchased in order to retain consumption of the beverages and jet service, the demand curve for designer clothes should have a negative slope. This is because an increase in price of a product will cause the quantity demanded for the product to be decreased according to the law of demand.

            Therefore, how do we explain the positive relationship between price and quantity demanded for a luxury good? As more and more consumers are brand-aware and prefer products that have an element of exclusivity as they want to achieve a certain status by purchasing a certain product. Most consumers view high price tag on a product indicates not only that the product is exclusive but also a sign that the product is special as it is harder to be afforded by most people. A low price would not achieve the same image as consumer will think that product is easily available for all thus they perceive it as a non-exclusive product. High price tends to attract particular consumers into the market. This leads to the demand curve for that product to be shifted out to the right as shown in the diagram below thus affirming that there is a positive relationship between price and quantity demanded for the product is associated with a change in tastes and preferences.

            Most firms that have strong brand equity thus commands premium prices for their products but they still have a large customer base for their products as the demand for these products are tied to tastes and preferences even there are cheaper alternatives. In order to maintain their products’ exclusivity, they keen to avoid their product being sold at discount prices under most circumstances even if their products have no demand. The high price of the product and the distribution of the product through licensed retailers which are strictly regulated are deliberately managed in a way to promote the product’s high-quality image. Firms usually will develop their products to fulfill consumers’ tastes and preferences to an extent that consumers will always expect their products to be expensive and more exclusive than cheaper alternatives. A high-price image of a product must be protected as low price would have detrimental effect on consumers’ tastes and preferences. This will in turn results the demand curve for the product to shift to the left, reducing the amount of products sold if the price is lowered.

            In conclusion, the taste and preference for a product would only shift the demand curve to the right if there is a positive improvement or that there is shift of the demand curve to the left when there is a switch in taste and preference. When demand curve is shifted to the right, more products are being sold at any given price. When demand curve is shifted to the left, fewer products are being sold at any given price. Change in tastes and preferences can only be reflected in shifts in the demand curves and not movement along the demand curve.