Relative price is when changes in the relative price lead to changes in consumption choices. If a good that is valued by consumers suddenly has a lower cost then the consumers are likely to buy more of that good. In consuming more of that good, the consumer will have to cut other goods to balance out their budget and spending. The consumer sees that good as a higher utility and gets a greater benefit from consumer more of that good.
For example, if Publix is having a buy one get one sale of coca-cola consumers are more likely to buy coca-cola than any other soda brand. The price of each bottle of coke is lower than then normal price the consumer will buy more of it to reduce how much they have to pay in the future. Their budget will decrease but in the long run buying more of the sale soda is smarter because it will reduce the price they pay on soda overall.
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I liked your example. This explains why my mom randomly comes home with 10 cases of Coke at a time because they had a sale!
ReplyDeleteI liked the example too. I think relative price also relates to coupons or sales in retail, because when you recieve a coupon in the mail for a big spring sale at one of your favorite stores, whether it be Best Buy or Macy's it will probably give you the initiative to go in and check out the sale items. Therefore pushing customers to spend money on the items the store chooses.
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