When The Price Of A Capital Good Increases, What Happens To The Prices Of Related Consumer Goods And Services? Why?


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Connor Sephton answered
Once the price of a capital good increases, it's expected that the prices of related consumer goods and services are also going to increase because companies are also after gaining profits and they can't do so without increasing the prices of their products.

The business industry is very dynamic. It's very hard to predict when prices are going to go down and when they will shoot up. It's because prices are never fixed. Many companies have to increase their capital every now and then in order to keep up with the demand of the public. Also, they are buying things needed by their company in order to operate.

For example, a company manufacturing beauty products also need to buy raw materials needed in making them. The prices of raw materials vary but once they go up, companies are also bound to increase the prices of their products. This is only normal since they will end up bankrupt if they don't increase their price. They'll be spending more on raw materials without gaining profits in return.

Not only are companies having to buy raw materials from other manufacturers but they also have other expenses which contribute to the unstable price tag they have on their products. For instance, they need to pay for their ads. Companies are paying a huge deal of money just to promote their goods or services. They pay television and radio stations, newspapers and magazines, and also the endorsers of their products. Add to these the salaries they need to pay their workers and other incidental expenses such as packaging and transportation.

So don't be surprised the next time prices of related consumer goods and services increase since it's a part of the business cycle. Further, it's one way for businesses to earn profits and avoid going bankrupt.

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