The interaction of the demand and supply curves causing them to shift finally leads to an equilibrium price. This puts some ceiling on the amount of output that any firm should produce. Any amount in excess of the equilibrium output would amount to waste. Prices above the equilibrium put the firm at a disadvantage over competitors. However, not all economies are allowed at determine prices freely. The government may interfere with the pricing by either setting top limit or lower limit.
Such moves adversary affects firms if the cost of production is increasing on the government remains adamant on prices. The advantage with the government intervention would be to counter unfair competition. Some large companies could lower their prices below the equilibrium to destabilize small upcoming firms. Since the small companies are struggling to build themselves, the costs of production are huge and can only be met by offering prices at equilibrium or just above.
Since large companies are able to operate for a while at low prices they should not be allowed to fizzle out the competing firms. The government should always put rules that govern fair competition. All firms are established with an intention to make profits and some managers would
Band wagon effects are the affairs that occur when individuals demand more of a product at a particular price when a larger number of other individuals demand the product. This theory suggests that when consumers of a certain product or service increase over time, the likelihood of the remaining consumers in the market to join them increases. In short, when customers increase, they influence others to join in buying certain products from certain firms. This is both beneficial and harmful to a firm depending on whether it is the one gaining or loosing the consumers.
The snob effect is usually the opposite of the bandwagon effect. In this theory, consumers demand for a good decrease with the number of other consumers who have purchased the good. This means that as more customers buy a product the consumers avoid buying these goods. This is driven by desire to own unique products rare to find with others. A firm involved in the production of such goods and services suffers a greater risk of running out of business. The managers should not allow overproduction of such goods as this would mean loss of consumers (McVConnel, & Brue, 2005).
The snob and bandwagon effect determine the consumption behaviors of markets. A bandwagon mentality characterizes status oriented consumption which is favorable to certain firms. The snob effect is characteristic of consumption in pursuit of exclusivity. Every firm should know the consumption trends of its target market to enable them make prudent decision for production ( Mason, 1999). The other effect that determines the consumption trends of certain goods are the Veblen effect.
Veblen goods are the goods where people’s preference for buying them increases as their price increases. This means that as the goods become costly consumers gain greater interest in buying them. Such goods characterize the conspicuous consumption in which the more costly a good is, the more likely those customers with money will buy them. Such goods are like luxury cars and expensive perfumes. If the prices of such commodities are decreased, people would lower their preference for them.
Such goods should always be maintained at high prices but with top quality. A griffens good is categorized under inferior goods. The inferior goods are those whose demand only increases when income levels of people decrease. This means that these goods would not normally be bought by consumers. When the income levels of consumers go down, these goods begin to receive increased demand. The firms that engage in the production of such goods should ensure that they closely monitor the prices of normal goods so that they would produce these goods in large quantities.
When income levels are low for griffens goods, the price elasticity of demand (PED) is positive. Price elasticity of demand is a measure that relates the changes in quantity demanded of a good and changes in price. The price of a good is relatively inelasticity if the quantity demanded does not change much when the prices of the goods changes. For most goods price elasticity of demand is negative. The griffens goods differ since an increase in demand is driven by an increase in price.