Price mechanism in economics is the technique or the process in which the prices of goods or services totally affect the supply and demands of goods and also services.In this technique price plays an important or key role between the consumers,producers and resource providers.
Changes in consumers income is the cause for a shift in demands.As income rise consumers will be able to pay more,while a fall in incomes will cause demand to fall.But it depends on the type of product concerned.
How demand affects different types of Goods?
•Normal goods-If the demand for a product tends to rise as income rise,the product is called as normal goods
Example: LCD,expensive cars,branded clothes diamonds etc demand increases when the income of the consumer increase.
•Inferior goods-If demand tends to fall as income rise,the product is said to be an inferior good.In other words it is also called as Negative income elasticity.
Example:A CCD’s coffee can be an inferior goods compared to Starbucks coffee.When a consumers income drops,he opt for CCD’s coffee on the other hand when the income increases he may be able to afford for Starbucks which is more expensive.
•Substitute goods-It refers to one good that can be used instead of another i.e two goods for which an increase in the price of one leads to an increase in the demand of the other.
Example-Tea and Coffee,if the price of coffee increases the consumers demand will shift to tea and the demand of tea will increase even without the price of tea being changed.
Under this mechanism if the demand of the good increases then price of the goods also increases and thereby a shortage of goods starts.So this is the signal to suppliers to provide more goods or expand production to meet the higher demand.Perhaps for some good when the price increases,the demand gradually decreases.And thats the reason why price mechanism affects every economic situation in the long term.
How demand affects different types of Goods?
•Normal goods-If the demand for a product tends to rise as income rise,the product is called as normal goods
Example: LCD,expensive cars,branded clothes diamonds etc demand increases when the income of the consumer increase.
•Inferior goods-If demand tends to fall as income rise,the product is said to be an inferior good.In other words it is also called as Negative income elasticity.
Example:A CCD’s coffee can be an inferior goods compared to Starbucks coffee.When a consumers income drops,he opt for CCD’s coffee on the other hand when the income increases he may be able to afford for Starbucks which is more expensive.
•Substitute goods-It refers to one good that can be used instead of another i.e two goods for which an increase in the price of one leads to an increase in the demand of the other.
Example-Tea and Coffee,if the price of coffee increases the consumers demand will shift to tea and the demand of tea will increase even without the price of tea being changed.
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