2.2 (Firms,Consumers & Elasticities of Demand) Flashcards
2.2.1 What is price elasticity of demand (PED)?
+ what are the two types?
measures the response of quantity demanded to changes in price (sensitivity/responsiveness of demand)
+ price elastic: quantity demanded changes by a higher percentage than change in price
+ price inelastic: quantity demanded changes by less than the percentage change in price
Why is PED significant for firms in:
1) Mass markets?
2) Niche markets?
1) Mass markets are subject to extreme price competition so generally have elastic demand. Demand is very responsive to a change in price.
2) Niche markets are less affected by price competition & so generally have inelastic demand.
Demand is not very responsive to a change in price
Producers can ‘get away with’ putting up their prices as customers are likely to still want products (more bespoke)
What is the equation for PED?
+ how is the figure for PED interpreted?
% change in quantity demanded/% change in price
+ if PED is between 0 & -1 demand is inelastic
+ if PED is beyond -1 demand is elastic
1) What is Perfectly Elastic Demand & how is this shown on a graph?
2) What is Perfectly Inelastic Demand & how is this shown on a graph?
3) What is Unitary Elastic Demand?
1) PED= infinite
quantity can change w no change in price
(horizontal line)
2) PED=0
quantity won’t change with a change in price
(vertical line)
3) PED=1
quantity & price change by the same percentage
What factors influence PED?
+ how?
Necessity
+if we need something for survival our purchases will hardly be influenced by price
Substitutes
+ where there’s close substitutes brands aim to differentiate the product to limit elasticity
Time
+ demand tends to be inelastic in short term but elastic in the long term
Proportion of Spending
+ expensive items taking up a higher proportion of spending have a high price elasticity
How does inelastic demand affect revenue?
- how is this shown on a graph?
When supplier puts up price the higher price increases the revenue per unit but reduces the number of units sold
- there is a ‘box’ of extra revenue which is much bigger than the small box of lost revenue
How does elastic demand affect revenue?
- how is this shown on a graph?
When a supplier puts up price the higher price increases the revenue per unit but reduces number of units sold. (Supplier can gain extra revenue by reducing prices)
- there is a ‘box’ of lost revenue which is much bigger than small box of increased revenue
How does PED vary along the demand curve?
STRAIGHT LINE
Top part = elastic demand
Middle point = unit elastic
Bottom part = inelastic demand
CURVE
Left part = elastic
Highest point = max total revenue
Right part = inelastic
2.2.2 Why would a firm choose cost-plus pricing & what is a possible drawback of this?
+ what is the calculation for this?
What is competitive pricing often reliant on?
+ what is it often associated with? example?
Ensures profits are made on each unit sold & is very common in retailing. But, can be disastrous if no though is given to the market or competitors’ prices
+ price per unit= total budgeted cost + mark up/budgeted sales in units
- a low profit margin & high volume of sales to remain profitable
- price leader setting price to demonstrate dominance which may turn into collusion & a cartel
+ oligopolies e.g supermarkets ‘price matching’
What is psychological pricing?
+ what are some examples of this?
(why firms use this?)
firm uses a range of strategies to persuade the consumer their prices are cheaper
+ ‘charm price’ e.g 10 to 9.99
+ ‘headline low price’ then charging for extras e.g airlines charging extra for baggage
(useful for when customers seek value for money and is thought to increase sales by up to 30%)
What enables businesses to price skim?
+ examples of businesses who price skim?
What happens with predatory pricing?
First mover advantage
+ e.g games console manufacturers, Apple & Dyson
- Dominant firms set price low to restrict or eliminate competitors
- Exploitation of elastic PED for new products & inelastic PED for established products
What are the 6 factors which determine the most appropriate pricing strategy for a particular situation?
+ how does they affect pricing strategies?
(what else is considered by businesses?)
1) Number of USPs/amount of differentiation
+ customers base decisions on more than price alone so strength & quality of differentiation is key
+ charge a higher price with USP or differentiation
2) Price Elasticity of Demand
+ businesses w price inelastic demand have more scope for higher prices
3) Amount of competition
+ competitive pricing essential in competitive markets & many want to avoid ‘price wars’
+ if substitutes are seen as inferior, it gives freedom to set prices w out being influenced by rivals e.g Glastonbury
4) Strength of Brand
+ stronger brands e.g Dulux, Heinz & Coca-Cola can use premium pricing w out damaging sales
+ brand proliferation may occur e.g Daz, Bold & Ariel all owned by Proctor & Gamble
5) Stage in Product Life Cycle
+ introduction= cost-plus pricing
+ growth= penetration pricing
+ maturity=competitive pricing
+ decline= harvest pricing
6) Costs & Need to make a profit
+ firms must ensure they can ensure sufficient finance to fund unprofitable early years
+ firms may need to cut costs or slash prices to survive
(target audience & marketing mix)
How have social trends affected pricing?
+ what are loss leaders?
- businesses are now operating in a price transparent environment due to price comparison sites & online sales
- some businesses will cut costs to pass on savings to consumers
- online sales have broadened choice & competition & social media can spread information quickly
- loyalty schemes & promotions can help secure lower prices for consumers
+ product sold at a loss to attract consumers
2.2.3 What is product differentiation & how can it be achieved?
+ examples of businesses who have created product differentiation?
way of gaining competitive advantage (via USPs) to create brand loyalty & therefore reduce PED (steeper demand curve). This can lead to increasing revenue and make it harder for rivals to compete
- differences in quality
- differences in functional features/design
- ignorance of buyers about essential features (asymmetric information)
- marketing by sellers
- differences in availability
+ Gloucester & Tebay Services (- word of mouth promotion)
+ Dyson (design)
+ Nike (branding)
+ BMW (performance)
What is promotion?
+ what are the two types of advertising
advertising, branding, PR & packaging
+ informative advertising: designed to alert potential customers to product features
+ persuasive advertising: influencing customers by engaging their emotions
What are the 4 parts of a marketing mix?
+ what is this dependent on?
1) Product (e.g variety, quality, design, packaging)
2) Price (e.g discounts, payment period)
3) Place (e.g channels, locations, logistics)
4) Promotion (e.g advertising, PR, personal selling)
+ market, potential customers & nature of product
What is a marketing plan?
+ what is big data & (how is it collected)?
creating a strategy that is appropriate for the size of the business, nature of the product, the market & the effort of its competitors (includes setting an appropriate price)
+ high volume, high velocity & high variety information combines with processing to provide better insight & decision making
(programmes which track consumer behaviour)
What are the different types of advertising, promotion & branding?
+ advantages of each
- disadvantages of each
1) Public Relations
+ promotion via storytelling
+ create a name for themselves
- difficult to measure success
- story can become skewed
2) Direct Marketing
+ can track success
+ can test usefulness before going full scale
- many consumers don’t want to be contacted
- can lead to poor quality leads
3) Personal Selling
+ method can be changed to target client
+ can build strong personal relationships
- price of finding consumer is high
- employees require training
4) Advertising
+ potential reach is great
+ some types can be easily tracked
- could be backlash from consumers
- targeting can be impersonal
5) Sales promotion
+ can encourage repeat purchases
+ can entice reluctant customers
- may only lead to one time purchases
- expensive to manage
6) Sponsorship
+ can receive positive effects
+ can spread brand easily
- can receive negative effects
- may be limited genuine brand exposure
7) Digital Communications
+ can target consumers via paid search results & banner
+ cheaper
- potential ad clutter
- consumers may ignore them
What is a distribution network?
- what should they do?
+ what is choosing the right distribution network dependent on?
shows journey of a product/service from producers to consumer
- encourage repeat purchase
- enable safe delivery
- maximise potential customers
- ensure quick delivery
- provide market info to consumers & retailers
- create a positive relationship between producer & consumer
+ the product (new/old, type)
+ the market (cheap/expensive, mass/niche)
+ legal restrictions
+ customer expectations
What is a distribution channel?
+ what are the two types of distribution channel & examples of each?
flow of organisations that connect a product from producers to consumer
+ short channel distribution: involves just producer & consumer
+ long channel distribution: involves producer, consumer & several intermediaries
e.g producer, wholesaler, retailer & consumer (common for large machinery/equipment sellers)
e.g producer, retailer & consumer (common for electrical goods manufacturers)
Why is online/net distribution important for businesses?
+ what are advantages & disadvantages of this?
- businesses must stay informed of any trend that may affect distribution
- consumers expect products to be available online & a variety of methods available e.g apps, websites & payment methods such as PayPal
+ can cut costs & improve efficiency
+ allows firms to have multiple distribution channels (e.g Click & Collect, renting areas in other stores & delivering direct from shops/warehouses)
- still costs for a business (e.g Google allows companies to sponsor their link)
2.2.4 What is Income Elasticity of Demand (YED)?
+ what is the YED of:
1) normal goods?
2) normal necessities?
3) normal luxuries?
4) inferior goods?
measures the responsiveness of quantity demanded to changes in income
+ 1) positive (as consumer income rises, more is demanded at each price level)
+ 2) 0-1
+ 3) 1+ (demand rises more than proportionate to a change in income)
+ 4) negative (as income rises, demand falls - ‘counter cyclical goods’)
How is YED calculated?
% change in demand/% change in income
What does____ mean?
1) negative YED?
2) YED=0
3) YED= 0-1
4) YED= 1
5) YED= 1+
+ what can inferior or normal goods be?
1) negative income elasticity (demand falls as income rises)
2) zero income elasticity (demand does not change when income rises)
3) income inelastic (demand rises by a smaller proportion than income)
4) unit income elasticity (demand changes proportionately with income)
5) positive income elasticity (demand changes by a greater proportion than income)
+ either elastic or inelastic
