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"Would love to hear differing opinions :)" Erm... A decrease in demand does not lead to an increase in price.

tmnvix 9y ago
That's a bit simplistic. Substantial demand makes economies of scale possible which can lead to lower prices. The opposite is also true (i.e. lack of demand leading to increased production costs).
- RhodesianHunter 9y ago
  Costs do not drive price. Supply and demand do.
kbutler 9y ago
Economies of scale apply in reverse as well, and reduced sales reduces the number of items over which fixed costs can be amortized. Decreased demand can lead to decreased production, causing further increased prices and further decreased demand. If the market clearing price rises above the demand curve, production ceases.
- RhodesianHunter 9y ago
  'Decreased demand can lead to decreased production' Not can, does. You're moving further down the supply curve. 'causing further increased prices' No... less demand leads to less supply at a lower optimum price.
  - kbutler 9y ago
    > No... less demand leads to less supply at a lower optimum price. Not always. If I make fancy handkerchiefs, and I can sell 2 per month, I will make 2 by hand and charge a high price. If there is demand for 100,000/per month, I'll develop a way to mass produce them and charge a lower price per handkerchief (which may further increase demand.) But if demand fades, I won't be able to sustain the equipment/workers that produced the 100,000/ month, and if I continue to produce any, it will probably drop back to a higher price, even at a lower demand. This can occur because of consumer surplus and differing marginal demand. At the mass-producing volume, people who are willing to pay 100x for the product get what they need for a price of 1x. The marginal consumer gets it for exactly the price he is willing to pay. All those less motivated customers drop out at the higher price which is necessary to support a limited production, leaving the 100x customers paying at their maximum price, because no supplier can profitably produce that small an amount for a lower price. For example, obsolete technologies may increase in price as demand goes down.

That's a bit simplistic. Substantial demand makes economies of scale possible which can lead to lower prices. The opposite is also true (i.e. lack of demand leading to increased production costs).

RhodesianHunter 9y ago
Costs do not drive price. Supply and demand do.

kbutler 9y ago

Economies of scale apply in reverse as well, and reduced sales reduces the number of items over which fixed costs can be amortized. Decreased demand can lead to decreased production, causing further increased prices and further decreased demand. If the market clearing price rises above the demand curve, production ceases.

RhodesianHunter 9y ago
'Decreased demand can lead to decreased production' Not can, does. You're moving further down the supply curve. 'causing further increased prices' No... less demand leads to less supply at a lower optimum price.
- kbutler 9y ago
  > No... less demand leads to less supply at a lower optimum price. Not always. If I make fancy handkerchiefs, and I can sell 2 per month, I will make 2 by hand and charge a high price. If there is demand for 100,000/per month, I'll develop a way to mass produce them and charge a lower price per handkerchief (which may further increase demand.) But if demand fades, I won't be able to sustain the equipment/workers that produced the 100,000/ month, and if I continue to produce any, it will probably drop back to a higher price, even at a lower demand. This can occur because of consumer surplus and differing marginal demand. At the mass-producing volume, people who are willing to pay 100x for the product get what they need for a price of 1x. The marginal consumer gets it for exactly the price he is willing to pay. All those less motivated customers drop out at the higher price which is necessary to support a limited production, leaving the 100x customers paying at their maximum price, because no supplier can profitably produce that small an amount for a lower price. For example, obsolete technologies may increase in price as demand goes down.