Question

What happens to the demand for a network good when the price is lowered? Explain how networks effects work and give an example of a product with network effects.

Answer 1

When the price of the network good is reduced the demand for that good will increase and that will allow more and more people to use the goods due to the network effect, Network effect is when the value of the goods increase as more and more people use it. for example facebook, imagine only Mark and his friends use facebook and no one else. The number of memes, videos and status will be much less on it and people in the market may not enjoy it as much but if there are 100,000 people on it then the utility that a perosn gets from it will increase many fold and it will attract more and more people to use it , this is network effect.