Module 6 - Pricing Flashcards
A price sends signals to customers about what?
Quality, exclusiveness, availability etc.
How can Price be a powerful weapon?
Can drive out competitors,
Create barriers to entry for potential new competitors
Force “price-following” behaviour
How can info be gathered to get a more accurate price?
Historical data analysis
Pricing experiment
Pilot marketing studies
Market research
What is cost plus pricing
You add a mark-up on top of the cost of the product. This strategy aims to make sure a business covers its costs and makes a profit
Why can cost plus pricing be bad?
Over simplification
Eg assume no one else in the market will react
What is target pricing?
Start from the level of funding the business has and the level of return that it needs to make,
Then work backwards to determine the selling price needed to achieve this
Other pricing strategies?
Market skimming
Premium pricing
Market penetration
Limit pricing
Dynamic pricing
Freemium
Loss leader
Pay what you want
How does market skimming work?
Start high then lower
How does premium pricing work?
Set and keep high prices
How does market penetration work?
A new product is priced a low level then price increases
How does Limit Pricing work?
Set profits low to create a barrier for entry
What is dynamic pricing?
Change prices depending on different times of year - eg flights
What is freemium?
Eg fortnite / razors and blades
What is a loss leader?
Sell a product at a loss to attract customers and then get them to buy other stuff
What is Pay What You Want?
Allows customers to pay what they want
Psychology pricing - common techniques used to affect consumers reactions
Price anchoring
The power of 9
Decoy pricing
What is price anchoring?
Products are placed next to other more expensive ones - to make them look cheaper
What is the power of 9
Eg £1.99
What is decoy pricing
Make it seem like the best value there when it’s not actually really good value itself - popcorn pricing
When may a business need to change the price of a product?
In response to competitors actions
If a competitor reduces its price (potentially to gain market share), what strategies are available to remaining companies in that market?
Maintain the current level of price (only in certain circumstances where competitors change is not really a threat)
Maintain current level of price but adopt alternative marketing strategies - find another USP
Reduce prices
Can prices change as a product moves through the life cycle? (May be worded as “do” in the exam)
Yes
What tends to happen in terms of demand when price goes up
Demand tends to go down
What tends to happen when prices go down?
Demand goes up
Demand definition
The quantity of goods that buyers are willing and able to purchase over a period of time at a given price
What does the Law of Demand state?
As the price of a good increases, the quantity demanded of that good will decrease, and vica versa
There are three factors which help to explain the law of demand:
The law of diminishing marginal utility
The income effect
The substitute effect
In the law of demand, what is the law of diminishing utility
Once a consumer has bought one unit of a product, the extra benefit from having each subsequent unit decreases
As they get less from each unit, the amount they are willing to pay decreases
In the law of demand, what is the income effect?
A consumer is constrained by their available income and will not be able to afford many units of a product (expensive)
In the law of demand, what is the substitute effect?
The more expensive a product becomes, the more likely a consumer will try and find a substitute product
What does the demand curve look like?
If a factor that influences demand changes and causes the demand curve to shift to the left, at the same price level, how will this impact demand?
Decrease demand
If a factor that influences demand changes and causes the demand curve to shift to the right, at the same price level, how will this impact demand? (Terribly worded question)
It will increase demand
How would the price of substitutes impact the demand curve?
If a substitute good gets cheaper (or the original gets more expensive), the demand for the substitute product increases
Causing the demand curve to shift to the left for the original product (a decrease in demand)
How would the price of complements impact the demand curve?
If a complementary product gets cheaper, the demand for the complementary product (and therefore the original product) increases
Causing the curve to shift to the right
How would changes in consumer incomes impact the demand curve?
Demand curve for ‘normal goods’ will increase as income rises (shift to the right)
Demand for ‘inferior goods’ will decrease as income rises (shift to the left)
How changes in Tastes impact the demand curve?
If an item is in ‘fashion’ demand would increase
Causing the curve to shift to the right
How would changes in Expectation of Future Price Rises impact demand?
If consumers believe prices are likely to rise in the future, current demand will increase
Causing the curve to shift to the right
How can legislation impact the demand curve?
Government legislation can lead to changes in demand
Eg a ban on mobile phones whilst driving meant an increased demand for hands free kits
In economics, demand elasticity refers to what?
How sensitive demand is in response to a change in another variable, such as price
Equation for price elasticity of demand
PED = % change in quantity demanded / % change in price
IMPORTANT
Do you usually use the negative sign with Price Elasticity of Demand (PED)
No
Where PED is less than 1…
The % change in quantity demanded is less than the % change in price
This is referred to as being inelastic
Where PED is greater than 1…
The % change in the quantity demanded is greater than the % change in price
The price elasticity is referred to as being elastic
The PED of any product can be influenced by a number of factors:
Substitute products
Advertising & Tastes
Luxury or Necessity
The proportion of income spent on the good
Time
If PED > 1, total revenue will “what” when price is lowered?
Why?
Increase
Elastic
If PED = 1, then total revenue will be “what” by a change in price?
Unaffected
Perfectly Inelastic
If PED < 1, total revenue will “what” when price is lowered?
Fall
Inelastic
When is a good time to use Cross-Price Elasticity of Demand
A business may want to see how price changes will impact it’s own products
Or see how it’s sales will be affected by another company’s price change
Equation for cross-price elasticity of demand
% change in quantity of A demanded
/ % change in price of B
Can Cross-Price Elasticity of Demand be negative or positive?
Yes
Cross-Price Elasticity of Demand is “what” for substitute products
Positive
Cross-price elasticity of demand is “what” for complementary products?
Negative
Income elasticity of Demand equation
% change in quantity demanded / % change in income
How does a normal good work with IED? (If income rises)
Income rises -> demand shift to the right -> IED is greater than 0
How does an inferior good work with IED? (If income rises)
Incomes rises -> demand curve shifts to the left -> IED is less than 0
Necessities products will have IEDs closer to?
Zero
Luxury products will tend to have what kind of IED?
Strong positive
Definition of supply
The quantity of a good suppliers are willing and able to sell over a period of time at a given price, with the aim of maximising their profits
What does the law of supply state?
As the selling price of a good increases, the quantity supplied of that good will rise, and vica versa
What do the supply curves look like?
Why are supply curves sloped that way?
At higher prices, the market for a good becomes more attractive to suppliers
With supply curves, changes in factors that influence supply can cause? (What movement to the curve)
Either a shift to the right (if quantity supplied increases at every price)
Or to the left (if quantity supplied decreases at every price)
Factors influencing the position of the supply curve include:
The cost of making the goods
Technology
Government regulation
The profitability of alternative products
How may the cost of making goods impact the supply curve?
If cost of production rises, product becomes less profitable relatively to other products
Therefore, firms will supply less at every price, shifting the curve to the left
How may technology influence the supply curve?
An improvement in tech shifts the supply curve to the right
Such improvements will mean units are easier and therefore cheaper to produce profitably
How may government regulation influence the supply curve
Tighter gov reg may have the effect of reducing supply
So the curve shifts to the left
Profitability of alternative products, how would this impact supply curve
If the profitability of alternatives rises, suppliers will switch to the alternative
Reducing the supply of the first product
Think it would shift to the left
What is the elasticity of supply?
The extent to which a change in the price leads to a change in quantity supplied
Price elasticity of supply equation?
% change in quantity supplied / % change in price
Is PES normally always positive?
Yes
When PES > 1, supply is?
Elastic and supply changes proportionately more than price
When PES < 1, supply is?
inelastic, and the quantity supplied changes proportionately less than price
PES is influenced by several factors, including:
Time period being considered
Cost of changing output
How does time period influence PES?
Shorter the time period being considered, the more inelastic supply is likely to be
Over a longer period of time, supply will be more elastic
How does cost of changing output impact PES? (In terms of elasticity not movement of the curve)
If cost involved in changing output is high, and it is difficult to switch product, supply will be more inelastic
If cost is low, supply will tend to be more elastic
What does the market mechanism look like?
What are the Factors of Production?
Land
Labour
Capital
Enterprise
What are the associated costs with factors of production?
These are costs that business owner needs to understand - almost like what the cost of each element is
Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profit
Fixed costs definition
Costs do not usually change even though output changes
Eg rent
Variable cost definition
Costs that change with output
Eg raw materials - more output more raw materials
Total cost = ?
Variable costs + fixed costs
Definition of Marginal Cost (‘MC’)
Equation for MC of Nth
The cost of making one additional unit
MC = Total cost of (N) - Total cost of (N-1)
Definition of Marginal Revenue (‘MR’)
The increase in total revenue from selling one more unit
If MR exceeds MC, it makes sense to?
Increase production
IF MC exceeds MR?
Increasing production would reduce profit and would not seem wise
When a Normal Profit is being earned
Total revenue = Total costs
If Total revenue exceeds total costs, then what is being earned?
A supernormal profit
What do supernormal profits attract to a market?
New competitors
When a product is elastic…
A change in price will result in a change in the quantity demanded
When a product is inelastic
A change in price doesn’t result in a big change in quantity demanded
% change in quantity demanded is less than the % change in price
