Chapter 4 Flashcards
What are the factors that determine price?
- The cost of providing the good or service
- Company objectives
- The company’s position in the market, the market segments, and the positioning decisions
- The target groups the enterprise wants to attract, and their willingness to pay
- The price set by competitors
- The type and nature of demand
- Legal or regulatory requirements
- Industry trends
What are the factors that affect demand?
- Income: An increase in income increases the demand for normal goods
- Price of substitute: When the price of one good/service increases, people replace it with a cheaper rival one.
- Price of complementary products: When the price of good/service increases, the demand for the other good/service decreases
- Consumers’ tastes or preferences: Products that are more popular and fashionable are more demanded
- Advertising: A successful advertising campaign results in an increase in demand
What are the factors that affect supply?
- Costs of production: Any change that results in higher production costs causes a decrease in supply
- Technology level: The utilization of advanced machines in the production process increases the supply
- Taxes and subsidies: Higher taxes increase the enterprise costs and consequently decrease supply. Subsidies and government grants reduce a firm’s costs and result in an increase in supply
- Weather and climate: Unpredictable changes in weather conditions particularly affect the supply of agricultural products
When is demand elastic?
- The product is easily substituted for more economically priced alternatives
- The product is not a necessity
When is demand inelastic?
- The product is unique
- The product has different qualities or is differentiated
- The product is a necessity
- The product is branded
What are the different pricing strategies and what are they for?
- Cost-plus pricing: This strategy considers both the cost of production and distribution. It is used when the business wants to recover the costs it takes in developing the product
- Competitive pricing: This strategy involves setting a price after comparing it with prices of competitors by either setting a lower price, the same price, or a higher price
- Penetration pricing: The enterprise using this strategy offer their products at a low price in order to enter a new market, then increase it once the business succeeds and establish itself in the market
- Price skimming: This involves setting a high price for a product and then gradually selling it for less. This strategy is mostly used for products that is a technological breakthrough or has no competitors
- Psychological pricing: This strategy is based heavily on people’s psychology. The business can increase sales without significantly altering prices
- Promotional pricing: This strategy is based on temporarily reducing the price of the product when there is a fall in sales
- Dynamic pricing: This strategy is involves changing prices regularly based on demand. This helps maximize sales revenue and increase efficiency
a) Explain how elasticity affects the demand for a product.
b) Which products are likely to have high elasticity (i.e., elastic) for their demand? Give examples.
a) If demand is elastic, an increase in price will cause sales to fall by more than the percentage change in price. However, if demand for a product is inelastic, an increase in price results in sales falling by less than the percentage change in price.
b) Products that are easily substituted for more economically priced alternatives and products that are not a necessity are likely to have high elasticity, such as jewelry or other luxury items.
A multinational oil company that also owns petrol or gas stations developed new stores that sell food and beverages to motorists in its stations.
a) If the business decides to decrease the price of petrol, would total revenue increase? Justify your answer.
b) Often, the company reduces the price of food and beverage items at certain times of the year. Why do you think this is done?
a) It depends on the elasticity of demand of petrol. Petrol usually has an inelastic demand, meaning revenues will increase following an increase in price, because consumers will not be highly responsive to changes in price.
b) This is done because the demand of food and beverage is decreasing when fewer motorists stop at the gas stations. It depends on the types of food and beverage. For example, during holidays, many customers might travel, reducing the demand.
The marketing consultant of a company suggested setting a price for a new product based only on internal factors. Do you agree with his suggestion? Justify your answer.
No, because a business must consider both internal and external factors when setting a price. External factors can significantly affect this decision as they provide information about consumers’ willingness to pay, competitors’ prices, the type and nature of demand, the legal requirements, and the industry trends.
[G] Which factors should be considered by businesses when deciding on the price of their products?
Prices are affected by costs, objectives of firm, the number of rival firms and the degree of competition.
[G] What factors are likely to increase the demand for a product?
- An increase in incomes
- A successful advertising campaign
- A decrease in the price of a complementary good
- An increase in the price of a substitute
- An increase in the population size
[G] What factors are likely to increase the supply of a product?
- A decrease in wages
- An increase in subsidies
- A decrease in the costs of factors of production
- A decrease in corporate taxes
- An increase in productivity and technology
[G] What are the factors that could make the demand for a product more elastic?
Product is not habit forming or a necessity and it has many substitutes.
[G] How is total revenue expected to increase when related to price elasticity of demand and price changes?
For elastic demand, as prices increase total revenues decrease. When demand is inelastic, an increase in price results in an increase in total revenue.
[T] Bake-Cake is a franchise chain selling cakes in small towns, where the major target market is local residents. The prices are set low because most of the consumers have low incomes. The owners of Bake-Cake are planning to establish new stores in the city centers; however, their decision will require developing a new marketing strategy.
a) Define marketing strategy.
b) Explain why the owners are required to develop a new marketing strategy.
c) Does decreasing the price of a product always guarantee higher sales? Justify your answer.
a) The marketing strategy outlines how the company intends to achieve its marketing objectives by considering the overall approach to be taken by the entire enterprise.
b) The marketing strategy provides decisions and direction regarding variables, such as market segmentation, target market identification, marketing mix elements, and expenditures. In this case, the Bakery is changing the marketing mix elements; therefore, it should have a new strategy.
c) It is not always beneficial to reduce prices. It depends on the value of PED. If demand for a product is inelastic, a decrease in price results in sales increasing by less than the percentage change in price. This results in lower revenues and profit margins.
