Firms is a business organisation who produce, or sell goods and services. There are many reasons for why firms would choose to reduce the price of a product and these include, substitution effect, competition, the effect of economic factors and the price elasticity of demand.
The substitution effect may make a firm choose to reduce the price of a product because if the price of a substitute good increases, then firms would reduce the price of the good they are selling so that consumers buy their product as the quantity demand for their product is likely to increase. This is so that they gain a maximisation of profits from the products that they sell. For example, if there is a rise in price for coca cola, the substitution effect causes consumers to move away from coca cola and choose Pepsi when the firms reduce the price. Therefore, the quantity demanded for Pepsi increases and the quantity demanded for coca cola decreases. This shows that it is beneficial for firms to reduce prices of a product due to substation effect because they are able to increase their total revenue.
Firms would choose to reduce the price of a product due to competition. If the firms’ competitors decided to reduce their prices of their products then the firm would reduce their prices even further for the same products so that the firm gains more consumers as consumers will be looking for firms that offer them the products at the cheapest price. This is because the firm would want more consumers because the more consumers they have the more products they will buy which means that the more sales and profits that the firm will make. Also, it is the best option for firms when there is competition because if their competitors reduce their prices and the firm does not then consumers will be attracted to their competitors and not them.
The effect of economic factors such as personal disposable