Friday, May 29, 2009

Demand Curves Slope Downward, Evidently

Earlier this month, I posted on the decision of a couple consumer products companies to try to ride out the downturn by stressing the value of their higher priced products.

It now seems one of them is rethinking the idea. According to this story (free at this writing) in today's edition of The Wall Street Journal, consumer giant Proctor and Gamble will be boosting offerings of lower-priced products. This comes after P&G issued a lower than expected earnings forecast for its next fiscal year which begins July 1.

It seems that its lower priced products have outperformed the premium-priced items. Evidently, when people have less money to spend they buy more of the lower-priced items than they do of the premium brands.

I think you can even work in substitution effect, opportunity cost, scarcity, and a whole raft of other economic concepts.

What do you think?

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
7. Economic thinking is marginal thinking.

8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

2 comments:

Mike Fladlien said...

I was wondering, I don't know, if P&G could argue that since the demand for these products have increased, the price must necessarily increase to meet the increase in the quantity supplied? I don't think these are Giffen goods. Of course, a strong case can be made that the goods are slightly differentiated. This post was stimulating--thanks!

Tim Schilling said...

I see your point, but I was thinking like this. Tell me if I've strayed someplace, because it's certainly possible.

I was looking at overall market for certain P&G products vs. the individual products.

Certainly, if we differentiate between two or more products, the
demand curve for the higher-price products will likely shift left as
total demand for the specific brand falls; and the demand curve for the lower priced product should shift to the right.

However, if we look at the P&G products as a whole, shouldn't we see a movement along to the curve, upwards and to the right? That
should demonstrate a shift to a higher quantity demanded for the lower priced products. P&G's willingness to accomodate the change in quantity demanded at the lower prices would then result in a change in the product mix, resulting in some change in supply.

Again, I may well be missing something.