Published by MBA Skool Team, Last Updated: October 21, 2014
What is Price Effect?
The change in demand of a product or a service due to change in the price of it is known as price effect. It also refers to the effect that any event has on a product or service’s price.
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.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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