Saturday, September 29, 2007

Influencing Demand

Demand for a product can be thought of as the product of two numbers: How many people want the product; and how many units that each person is willing to buy.

The first number can be increased by simply exposing the product to a large number of people, informing them of its potential value to them (what they can gain from using it).

Manipulation of the second number involves maximizing the amount of value that people perceive. If the product is competing with other products, the producer can increase demand by demonstrating its relative advantages (including offering more supply than the competition, which is manifested in either a lower price or a lower cost to the buyer for acquiring the product due to more convenient access).

A government can influence both demand and supply by imposing a tax on a product. This effective increase in the price of the product gives the market the impression of increased demand, but it acts as an additional cost to the producer since the producer can’t use the additional money to increase the supply of the product. Because supply doesn’t increase proportionally to the “demand” the price continues to stay elevated. Actual demand will drop in the presence of other, untaxed products perceived by buyers as having equivalent value that are easier to get (because they have a lower price).

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