Effect of Expected Increase in Price on Current Demand

Expected increase in price of a product in the future can have a significant impact on its current demand. Consumers' behavior is influenced by their expectations of future price changes and they may adjust their purchasing decisions accordingly. Let's delve into the details of how the current demand is affected by such expectations.

1. Substitution Effect
When consumers anticipate a future price increase for a product, they are likely to buy more of it in the present time to avoid paying a higher price later. This is known as the substitution effect. By purchasing the product now, consumers can benefit from the lower price and potentially save money in the long run. This leads to an increase in the current demand for the product.

2. Stockpiling
Another response to the expectation of a price increase is stockpiling. Consumers may choose to accumulate a larger quantity of the product than they currently need in order to have an ample supply for the future. This behavior is driven by the desire to avoid higher prices and potential scarcity. Consequently, the current demand for the product surges as consumers stockpile it.

3. Speculation
Some consumers may engage in speculation when they anticipate a price increase. They may purchase the product in the hope of selling it later at a higher price and making a profit. This behavior is particularly prevalent in markets where price fluctuations are frequent. Speculation can lead to an immediate increase in the current demand as consumers aim to capitalize on the expected price rise.

4. Forward Buying
Forward buying refers to the act of purchasing a product in advance to secure it at the existing price before an anticipated price increase occurs. This strategy is often employed by businesses and consumers alike. By buying the product ahead of time, consumers can lock in the lower price and avoid potential price hikes. As a result, the current demand for the product is heightened.

Conclusion
In summary, when consumers expect an increase in the price of a product in the future, their current demand for it tends to rise. The substitution effect, stockpiling, speculation, and forward buying all contribute to this phenomenon. By understanding consumer behavior and their response to price expectations, businesses can make informed decisions regarding pricing, production, and inventory management.