Economic theory suggests that as demand increases, suppliers are able to increase the price of products. Whereas, the law of supply states that as the price increases, more of the good/service is offered for sale by firms; the converse is also true. This is due to the profit incentive, by which firms exist to maximize their profits. Thus, according to the concepts, with an increase in demand, the new demand should intersect supply at a higher equilibrium price, vice versa.
However, during holiday seasons or on special occasions such as the Black Friday, firms readily lower their prices of goods despite the rapid growth of demand. Shifts in market supply and demand will change the market equilibrium, changing its clearing price and quantity. The primary non-price determinants that effect the shifts of the supply and demand are taxes, expectations, the price of related goods, seasonal change, and special events.
The expectations and demand for the price of goods before Black Friday are costlier than after it is put to sale. Consequently, after the sales start, a temporary surplus exists at the old equilibrium. This surplus is later eliminated by firms through cutting prices of excess supply. Consumers contribute by buying the residual amounts at successively lower prices, an increase in quantity demanded at each lower price. The increase in supply, therefore, results in a lower equilibrium price for the good at (P1?P2), and a higher equilibrium quantity of (Q1?Q2).
The goods of the special event are mainly composed of normal and luxury goods. In other words, it means that the demand of the good is highly dependent on the consumers’ willingness and ability to afford the good. During the special event, the demand of the consumers (PED) is highly elastic, and the good is likely substitutable. Because many shoppers simply mean to buy products that are cheap and low in price, consumers are not bound to choosing a particular good over another.
The degree to which consumers respond to changes in the price of a firm’s products and the price of a substitute good (XED) has major implications of a firm when it is considering raising or lowering its prices. In such events, PED and XED rates will encourage retailers to discount. Therefore, retailers that offer lower prices are likely to attract more customers and sell more merchandise.
Nonetheless, firms are not merely detrimental from the special event. Conversely, they can make profit through advertisements and discounts of complementary or other goods within their stores. Hence, shoppers are easily persuaded to undertake “one-stop” shopping. They may choose to other, higher-margin merchandise while in the store when they come to find the “loss leader” items. For consumers who are capable of purchasing more products, sales may remarkably encourage greater quantity purchases.
Especially because much of the merchandise allocated for the specific event loses considerable value after the event’s occurrence, firms dispose related merchandise before new trends arise. Ergo, the occasions are opportunities for the sellers to reduce their excess supply in high demand. Extreme examples involve Christmas ornaments and wrapping paper, but even sales of categories such as jewelry are heavily influenced due to fewer gifting occasions during the subsequent months.
Furthermore, those of online sales, seeing that technological development over the past decade had significantly enforced the easy accessibility various online stores, customers are more attracted to purchasing products delivered home, online. In addition, online retail stores often are not taxed, thus, does not collect indirect tax (sales tax) from the consumers. Therefore, firms can apply greater discounts and lower their price of goods to meet the demands of consumers.
In the short run, special events like Black Fridays are highly effective in the sense that firms can clear out their surplus under high demand. Likewise, consumers can experience high utility from the discount they receive from the suppliers. Nevertheless, these sales are only effective for short periods of time, as the marginal benefit of consumers would continuously decrease due to highly elastic demand. Eventually, the customers would also meet significant decline in sales, and both consumers and suppliers would not be able to achieve the optimal advantage from the events.
Although seemingly the retailers may lose money on items being put on sale, considering factors such as demand of the good, tax incidence, and the probability of costumers buying subsequent goods from the same store, firms are able to benefit from the sale in relation to the expanded consumer surplus.