Sunday, February 7, 2010

Why An Increase In Supply Will Lead To A Drop In Price?

This is a question being asked by my student recently. Simple. Let's use a little bit of economics and business sense here. Imagine that if there is only one seller in an area or there are just very few available around. This means, it is rather difficult to get hold of that particular item or service. As such it gives the producer some room to adjust the price upward since they are in control of the situation
On the other hand, if a good or service is so widely available that consumers can get hold of it just anywhere, then the producers will not be in advantageous position to manipulate the price upward. This is because, an increase in price will cause the consumers to substitute away from that firm and move towards its competitors. A reduction in price makes more sense in order to get rid of those stocks which may be sitting on the shelves too long. Furthermore there will be new stocks coming in from time to time. If those old stocks are unsold, then there is no place to keep these new ones