Project Report: Price and Demand Analysis in Accounting Diploma

This project report examines the fundamental concepts of price and demand within an economic framework, focusing on the relationships between supply, demand, and price fluctuations. It delves into the distinctions between normal, inferior, and Giffen goods, illustrating how income and substitution effects influence consumer behavior. The report provides a comparative analysis of relevant literature, exploring how changes in price impact demand in various market scenarios. It further explains the characteristics of normal goods, where demand increases with decreasing prices, and inferior goods, where demand may decrease as income rises. The report also analyzes Giffen goods, where the demand curve slopes upwards, and the negative income effect surpasses the substitution effect. The report concludes that the relationship between price and demand is not always inversely proportional and depends on the nature of the goods and consumer behavior. The report relies on several academic sources to support its findings and analyses the effect of price changes on the quantity demanded, and provides insights into consumer behavior, and market dynamics.

Running Head: Diploma for accounting
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Project Report: Diploma for accounting

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Contents
Introduction.......................................................................................................................3
Comparative analysis of relevant literature......................................................................3
Price and Demand Relationship: Normal Goods..............................................................5
Price and Demand Relationship: Inferior Goods..............................................................6
Price and Demand Relationship: Giffen Goods:..............................................................8
Conclusion......................................................................................................................10
References.......................................................................................................................11

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Introduction
Demand and supply are the crucial elements of an organization’s manufacturing
system. These elements are the important aspect of the economical model. In the normal
market scenario, the price of a product could vary due to the supplied product level and the
demand level of that product. This theory would offer the result to the company in
equilibrium of quantity and price. Deductions in the price directly make an impact over the
demand increment and whereas if the price would rise than the demand would be decreased.
It has been observed that in various cases, comparable income and substitution effect has
been witnessed. It has been found that with the in case of diverse situation, the price and
demand rules could offer different result. These rules go ahead in the way where substitution
effect is quite confirmed1. Though it has been observed that if the entire situations are normal
than the changes into the price directly make an impact over the quantity demanded. This
depict that the effect of substitution would influence the clients constantly to buy the goods in
lesser price.
Comparative analysis of relevant literature
Income effect only works with some assumptions. But in reality, various aspects are
there which affects the price and demand relationship. It is a universal fact that the increment
in the income would enhance the customer’s buying power. Price and demand relationship
could be affected in various situations such as Giffen goods, inferior goods etc2. inferior
1 Free, R, C,. (2010) 21st Century economics: A reference handbook, Volume 1, SAGE,
India
2 Hussain, T,. (2010) Engineering economics, Laxmi publications, India

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goods are those goods which are totally opposite to the normal goods as in the scenario of
inferior goods, with the increment in the level of income and the demand level decreases such
as if a customer’s income would be enhanced than he will switch from the bread to the pizza
and then the demand of bread would be reduced. As now the person would like to go for the
superior goods than the inferior goods3. At the same time, it has been observed that the
inferior goods have a positive relationship with the income. If the income would be enhanced
than the demand would be less and at the same time if the income would be lower than the
demand would be enhanced. Further, the changes into the price impact over the purchasing
power of the company, if the price would be lowered than the purchasing power of the
customer would be enhanced as in that case, customer would be able to save more money for
other products4. Consequently, the income effect has been analyzed and it has been observed
that it works in the same manner as the substation effect does. Equally the factors are
operating towards enhancing the quantity which has been demanded. Further, in the inferior
goods case, the effect of income is negative; as it works in the repeal way to the substitution
effect.
The outcome of price change varies according to the market situation and the
customer. Mainly, the price changes get affect due to the main two factors of virtual strength.
Thus, the effect of price is directly linked with the substitution effect and the income effect5.
3 Boyes, W & Melvin, M,. (2012) Economics, Cengage learning, USA
4 Chamberlin, E, H,. (2015) International economic association monopoly and
competition regulation, Springer, United Kingdom
5 Gottheil,. (2014) Study guide to Gottheil’s principles of economics, 7th, Cengage
learning, USA

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These aspects of the demand of the product make changes into the result which could be
occurred as the changes into the price. This outcome mainly depends according to the income
effect strength6.
Price and Demand Relationship: Normal Goods
In normal scenario, price-demand relationship could be recognized as an indifference
curve. So according to the given graph, price of two products and the demand of the product
could be plotted. The graph line expresses that the equilibrium point for the consumer would
be at A point. If the price falls in that case than the price of Y product and income of the
customer would be remain unchanged. This would make the changes into the graph line. The
Effect in the price would now divide into Income Effects and Substitution.
7
6 Hirschey, M,. (2008) Fundamentals of managerial economics, Cengage learning,
USA
7 Jong, H, W, D & Shepherd, W, G,. (2013) Mainstreams in industrial organisation,
Springer science & Business media, United Kingdom

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This graph depict that the consumer would get equilibrium point at the budget line, if
the equilibrium point lies over the right of Q, that depicts that the purchaser would buy more
quantity of product. Hence it has been confirmed that an individual could buy further normal
goods at the point of new equilibrium on budget line. This would result in an increment in
the demanded quantity which results in decrement in the price8.
Further, the changes into the demand of the products directly depend according to the
strength of substitution effect and the income effect. Income effect depict about a positive
relationship in this case. This would cause an enhancement into the products demand at the
time of decrement in the price. At the same time, in substitution effect case, the products
demand decreases because of price decrement.
Price and Demand Relationship: Inferior Goods
Further, it has been found that the inferior goods have a conflicting income effect. As at
the time of decreasing the price inferior goods demand also decreases which makes a
negative income effect. Due to that, the purchased quantity decreases, although the
substitution effect enhances the total purchased quantity. An individual expend a small
division of his or her income on a specific product9. If in any case, the price falls, than it
makes a slight income effect. Generally, this offset the effect of substitution.
8 Markovits, R, S,. (2014) Economics and the interpretation and application of U.S.
and E. U. Antitrust law, Springer science and business media, London
9 Morgan, K,. (2014) Price elasticity of demand for Mylan Laboratories, Pittsburg,
GRIN Verlag, Germany

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A decrement in a good’s price constantly depicts the consumer to purchase more
products. In various cases, the price decline would enhance the demanded quantity10. In
inferior goods case, the quantity demanded make changes along with the changes into the
good’s price. In such cases, the law of demand of Marshallian would work.
In inferior goods case, the relationship of price-demand has a less strong income effect.
If the income effect would be functioning in a proper manner than it the individual
would provoke to purchase fewer goods. Though, the substitution effect persuades the
consumer to purchase goods in lesser price relatively.
as a result, the net effect on products because of declining into the product makes an
impact in the quantity demanded as enhancement in demanded quantity. The Quantity
demanded get changes due to negative income effect in the market. In that condition, weaker
income effect makes a downward sloping demand curve.
10 Nikaido, H,. (2015) Monopolistic competition and effective demand (PSME-6),
Princeton university, London

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Price and Demand Relationship: Giffen Goods:
Griffin goods are those goods in which depict about the negative income effect. In this
case, a negative income effect is there which overcome the effect of substitution. when a
product’s price falls than it direct makes an impact over the quantity as the purchase power of
the individual would also decline. Though, when product’s price enhances, the products
purchase quantity would also be enhanced.
These relationships have a direct link among the products and the price. Increment in
the Griffin product’s price would also enhance their increment. The effect of income
substantially would make an affect over the spending of the individual over a huge
proportion. Decrement in the price of the product would offer a result into income release11.
For instance, Enhancement in the bread’s price would offer an outcome in the
decrement into the purchasing power of poor individuals. So, it becomes quite compulsory to
make a decrement into the luxurious product’s price. Individuals are tend to bought and
consume the Griffin products. It does not matter for them that how much prices has been
enhanced. Consequently, when the price of any inferior product enhances than the people
starts spending a huge amount to buy that product12.
11 Xu, J. Hajiyev, A. Nickel, S & Gen, M,. (2016) Proceedings of the tenth
international conference on management science and engineering management,
Springer, London
12 Arnold, R, A,. (2008) Microeconomics, Cengage learning, USA

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Decrement into the price of the inferior product at a huge level makes an impact over
the purchasing power of an individual. The inferior products make an impact over the
purchasing power as well as the consumption level of the individual. Due to this effect, the
entire consumption reduces and it makes a negative impact over the income effect.
The connection of price-demand in Giffen products case is initially into equilibrium
point, due to a decrement in the product’s price. Due to this, the indifference curve shifts.
This takes place due to negative income effect over the products, income and demand
relationship14. It provokes the individual to buy the less quantity of the product. In Griffin
Goods case, the quantity which has been demanded varies directly along with the product’s
price. The quantity which has been demanded of Giffen goods differ according to the price.
13 Paulsen, M, B,. (2013) Higher education: handbook of theory and research, Volume
28, Springer science & Business media, United Kingdom
14 Takahashi, A. Muromachi, Y & Nakaoka, H,. (2012) Recent advances in financial
engineering 2011, World scientific, London

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And thus, in this case the negative income effect is quite more than substitution effect.
Therefore, the in this situation demand curve would slope downward15.
Conclusion
Thus through this report, it could be concluded that the decrement in the price would
not always take a place due to increment in the demand. There are few conditions in which a
direct relationship could be seen among income and demand relationship of a product. For
understanding the effect of price and demand, it is required to understand following three
aspects which are Inferior, Griffin and Normal Goods. The demand and price both varies in a
different way which depends upon the nature of goods. Thus it could be concluded that, the
decrement in the product’s price would not causes an enhancement in the demand level
always. Under certain situations, the effect might pull in dissimilar directions. It go ahead in
the direction where substitution effect is quite certain.
15 Sivagnanam,. (2010) Business economics, Tata McGraw hill education, India

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References:
Arnold, R, A,. (2008) Microeconomics, Cengage learning, USA
Boyes, W & Melvin, M,. (2012) Economics, Cengage learning, USA
Chamberlin, E, H,. (2015) International economic association monopoly and competition
regulation, Springer, United Kingdom
Free, R, C,. (2010) 21st Century economics: A reference handbook, Volume 1, SAGE, India
Gottheil,. (2014) Study guide to Gottheil’s principles of economics, 7th, Cengage learning,
USA
Hirschey, M,. (2008) Fundamentals of managerial economics, Cengage learning, USA
Hussain, T,. (2010) Engineering economics, Laxmi publications, India
Jong, H, W, D & Shepherd, W, G,. (2013) Mainstreams in industrial organisation, Springer
science & Business media, United Kingdom
Markovits, R, S,. (2014) Economics and the interpretation and application of U.S. and E. U.
Antitrust law, Springer science and business media, London
Morgan, K,. (2014) Price elasticity of demand for Mylan Laboratories, Pittsburg, GRIN
Verlag, Germany
Nikaido, H,. (2015) Monopolistic competition and effective demand (PSME-6), Princeton
university, London
Paulsen, M, B,. (2013) Higher education: handbook of theory and research, Volume 28,
Springer science & Business media, United Kingdom
Sivagnanam,. (2010) Business economics, Tata McGraw hill education, India
Takahashi, A. Muromachi, Y & Nakaoka, H,. (2012) Recent advances in financial
engineering 2011, World scientific, London