Price effect is also observed when the price of a competitor product is changed. Let’s say that in a low differentiated product category, your competitor suddenly reduces his price, your demand will go down and vice versa.
Marketers use price effect or also sometimes discounting to manipulate the demand; however it is not known to be a sustainable method of doing so.
Price effect can be mathematically represented as
Price effect = Proportionate change in quantity demanded of X/ Proportionate price change of X
Price effect is said to be the summation of income effect and substitution effect.
Substitution effect means that the consumer is chose a less expensive product for maximizing his satisfaction as his nominal income is fixed.
Income effect is when due to an increase in price the demand of a product falls for normal goods and is reverse for inferior goods.