Question

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As prices of commodities begin to rise, consumption will likely shift at least in part to substitute materials. What are some potential issues in waiting for prices to give the signal to develop and implement the substitutes?

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As the prices of good and services begin to increase, shifting to its alternatives is possibly to occur in consumption. However, potential issues may arise from waiting for current prices feedback to dictate the development and implementation of alternatives. Since this event is relatively dependent to prices at a certain period of time, it may result inaccurate pricing of alternatives in the future. In response to the cheaper price of alternatives, businesses are force to lower their current prices, which can result to market instability. In some cases, the quality of goods and services is also below satisfactory level. Moreover, there may have multiple variables to consider that can also affect the pricing due changing market conditions and organizational competitions.

Answer 1

The question is when commodity prices rise, people start to buy substitute products. For example if rubber prices start to increase people will consume plastic more. Potential issues of this shift from rubber to plastic when rubber prices start to increase, issues in waiting for the price rise to give a signal to develop plastic products.

When prices of good and services increase, there is definitely a shift to the alternatives. However, potential issues such as development and implementation of alternatives will arise, wherein the industry has to quickly and steadfastly replace rubber with plastic, as prices give the signal, it means the firms did not prefer plastic over rubber otherwise they would have replaced rubber with plastic long back. This essentially means that the product quality will decline as the firms are not able to bear the cost of rubber. Thus the product will have less durability and customers might eventually reduce consumption.

When the substitutes start to come around it may also result in inaccurate pricing of the alternatives such as plastic, even though the cost of production is way lower, producers might price it only 10% lower than price of rubber which has increased. As prices of the costs of production reduce because of the cheap substitute products, businesses have to pass on the benefit to the consumer through lower product prices which may remove some businesses from the product chain as they are not able to survive in the market. And as the product has been replaced with cheap alternatives, the quality of the final product also gets deteriorated quite drastically. Even if the alternative product is found, there are several other costs which come into play such as machine for the new raw material, which might increase the cost of the product further.

Also, as the increase in prices signal the shift to substitute products, it might also mean when the price of rubber starts to decline, firms will again consume rubber and thus replace plastic with rubber.