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EY Accounting - Business Acumen > Module 6 - Pricing > Flashcards

Module 6 - Pricing Flashcards

1
Q

A price sends signals to customers about what?

A

Quality, exclusiveness, availability etc.

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2
Q

How can Price be a powerful weapon?

A

Can drive out competitors,

Create barriers to entry for potential new competitors

Force “price-following” behaviour

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3
Q

How can info be gathered to get a more accurate price?

A

Historical data analysis

Pricing experiment

Pilot marketing studies

Market research

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4
Q

What is cost plus pricing

A

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

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5
Q

Why can cost plus pricing be bad?

A

Over simplification

Eg assume no one else in the market will react

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6
Q

What is target pricing?

A

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

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7
Q

Other pricing strategies?

A

Market skimming

Premium pricing

Market penetration

Limit pricing

Dynamic pricing

Freemium

Loss leader

Pay what you want

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8
Q

How does market skimming work?

A

Start high then lower

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9
Q

How does premium pricing work?

A

Set and keep high prices

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10
Q

How does market penetration work?

A

A new product is priced a low level then price increases

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11
Q

How does Limit Pricing work?

A

Set profits low to create a barrier for entry

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12
Q

What is dynamic pricing?

A

Change prices depending on different times of year - eg flights

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13
Q

What is freemium?

A

Eg fortnite / razors and blades

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14
Q

What is a loss leader?

A

Sell a product at a loss to attract customers and then get them to buy other stuff

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15
Q

What is Pay What You Want?

A

Allows customers to pay what they want

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16
Q

Psychology pricing - common techniques used to affect consumers reactions

A

Price anchoring

The power of 9

Decoy pricing

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17
Q

What is price anchoring?

A

Products are placed next to other more expensive ones - to make them look cheaper

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18
Q

What is the power of 9

A

Eg £1.99

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19
Q

What is decoy pricing

A

Make it seem like the best value there when it’s not actually really good value itself - popcorn pricing

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20
Q

When may a business need to change the price of a product?

A

In response to competitors actions

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21
Q

If a competitor reduces its price (potentially to gain market share), what strategies are available to remaining companies in that market?

A

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

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22
Q

Can prices change as a product moves through the life cycle? (May be worded as “do” in the exam)

A

Yes

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23
Q

What tends to happen in terms of demand when price goes up

A

Demand tends to go down

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24
Q

What tends to happen when prices go down?

A

Demand goes up

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25
Q

Demand definition

A

The quantity of goods that buyers are willing and able to purchase over a period of time at a given price

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26
Q

What does the Law of Demand state?

A

As the price of a good increases, the quantity demanded of that good will decrease, and vica versa

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27
Q

There are three factors which help to explain the law of demand:

A

The law of diminishing marginal utility

The income effect

The substitute effect

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28
Q

In the law of demand, what is the law of diminishing utility

A

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

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29
Q

In the law of demand, what is the income effect?

A

A consumer is constrained by their available income and will not be able to afford many units of a product (expensive)

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30
Q

In the law of demand, what is the substitute effect?

A

The more expensive a product becomes, the more likely a consumer will try and find a substitute product

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31
Q

What does the demand curve look like?

A
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32
Q

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?

A

Decrease demand

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33
Q

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)

A

It will increase demand

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34
Q

How would the price of substitutes impact the demand curve?

A

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)

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35
Q

How would the price of complements impact the demand curve?

A

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

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36
Q

How would changes in consumer incomes impact the demand curve?

A

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)

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37
Q

How changes in Tastes impact the demand curve?

A

If an item is in ‘fashion’ demand would increase

Causing the curve to shift to the right

38
Q

How would changes in Expectation of Future Price Rises impact demand?

A

If consumers believe prices are likely to rise in the future, current demand will increase

Causing the curve to shift to the right

39
Q

How can legislation impact the demand curve?

A

Government legislation can lead to changes in demand

Eg a ban on mobile phones whilst driving meant an increased demand for hands free kits

40
Q

In economics, demand elasticity refers to what?

A

How sensitive demand is in response to a change in another variable, such as price

41
Q

Equation for price elasticity of demand

A

PED = % change in quantity demanded / % change in price

IMPORTANT

42
Q

Do you usually use the negative sign with Price Elasticity of Demand (PED)

A

No

43
Q

Where PED is less than 1…

A

The % change in quantity demanded is less than the % change in price

This is referred to as being inelastic

44
Q

Where PED is greater than 1…

A

The % change in the quantity demanded is greater than the % change in price

The price elasticity is referred to as being elastic

45
Q

The PED of any product can be influenced by a number of factors:

A

Substitute products

Advertising & Tastes

Luxury or Necessity

The proportion of income spent on the good

Time

46
Q

If PED > 1, total revenue will “what” when price is lowered?

Why?

A

Increase

Elastic

47
Q

If PED = 1, then total revenue will be “what” by a change in price?

A

Unaffected

Perfectly Inelastic

48
Q

If PED < 1, total revenue will “what” when price is lowered?

A

Fall

Inelastic

49
Q

When is a good time to use Cross-Price Elasticity of Demand

A

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

50
Q

Equation for cross-price elasticity of demand

A

% change in quantity of A demanded

/ % change in price of B

51
Q

Can Cross-Price Elasticity of Demand be negative or positive?

A

Yes

52
Q

Cross-Price Elasticity of Demand is “what” for substitute products

A

Positive

53
Q

Cross-price elasticity of demand is “what” for complementary products?

A

Negative

54
Q

Income elasticity of Demand equation

A

% change in quantity demanded / % change in income

55
Q

How does a normal good work with IED? (If income rises)

A

Income rises -> demand shift to the right -> IED is greater than 0

56
Q

How does an inferior good work with IED? (If income rises)

A

Incomes rises -> demand curve shifts to the left -> IED is less than 0

57
Q

Necessities products will have IEDs closer to?

A

Zero

58
Q

Luxury products will tend to have what kind of IED?

A

Strong positive

59
Q

Definition of supply

A

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

60
Q

What does the law of supply state?

A

As the selling price of a good increases, the quantity supplied of that good will rise, and vica versa

61
Q

What do the supply curves look like?

A
62
Q

Why are supply curves sloped that way?

A

At higher prices, the market for a good becomes more attractive to suppliers

63
Q

With supply curves, changes in factors that influence supply can cause? (What movement to the curve)

A

Either a shift to the right (if quantity supplied increases at every price)

Or to the left (if quantity supplied decreases at every price)

64
Q

Factors influencing the position of the supply curve include:

A

The cost of making the goods

Technology

Government regulation

The profitability of alternative products

65
Q

How may the cost of making goods impact the supply curve?

A

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

66
Q

How may technology influence the supply curve?

A

An improvement in tech shifts the supply curve to the right

Such improvements will mean units are easier and therefore cheaper to produce profitably

67
Q

How may government regulation influence the supply curve

A

Tighter gov reg may have the effect of reducing supply

So the curve shifts to the left

68
Q

Profitability of alternative products, how would this impact supply curve

A

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

69
Q

What is the elasticity of supply?

A

The extent to which a change in the price leads to a change in quantity supplied

70
Q

Price elasticity of supply equation?

A

% change in quantity supplied / % change in price

71
Q

Is PES normally always positive?

A

Yes

72
Q

When PES > 1, supply is?

A

Elastic and supply changes proportionately more than price

73
Q

When PES < 1, supply is?

A

inelastic, and the quantity supplied changes proportionately less than price

74
Q

PES is influenced by several factors, including:

A

Time period being considered

Cost of changing output

75
Q

How does time period influence PES?

A

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

76
Q

How does cost of changing output impact PES? (In terms of elasticity not movement of the curve)

A

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

77
Q

What does the market mechanism look like?

A
78
Q

What are the Factors of Production?

A

Land

Labour

Capital

Enterprise

79
Q

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

A

Land - Rent

Labour - Wages

Capital - Interest

Enterprise - Profit

80
Q

Fixed costs definition

A

Costs do not usually change even though output changes

Eg rent

81
Q

Variable cost definition

A

Costs that change with output

Eg raw materials - more output more raw materials

82
Q

Total cost = ?

A

Variable costs + fixed costs

83
Q

Definition of Marginal Cost (‘MC’)

Equation for MC of Nth

A

The cost of making one additional unit

MC = Total cost of (N) - Total cost of (N-1)

84
Q

Definition of Marginal Revenue (‘MR’)

A

The increase in total revenue from selling one more unit

85
Q

If MR exceeds MC, it makes sense to?

A

Increase production

86
Q

IF MC exceeds MR?

A

Increasing production would reduce profit and would not seem wise

87
Q

When a Normal Profit is being earned

A

Total revenue = Total costs

88
Q

If Total revenue exceeds total costs, then what is being earned?

A

A supernormal profit

89
Q

What do supernormal profits attract to a market?

A

New competitors

90
Q

When a product is elastic…

A

A change in price will result in a change in the quantity demanded

91
Q

When a product is inelastic

A

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

EY Accounting - Business Acumen (16 decks)

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