Price

Question 1

What is market mechanism

Answer 1

The interaction of supply and demand in the market place

Question 2

What are the effects of market mechanism

Answer 2

Set price of product and quantity supplied

Question 3

What is a price taker

Answer 3

accept the price set by the market ( only option in perfect competition)

Question 4

When does perfect competition occur

Answer 4

When goods are undifferentiated (can not be told apart eg lettuce tomatoes) there are a large number of producers
Producer has no control over price so must accept market price (price taker)

Question 5

What are price makers

Answer 5

If not a price taker a business has the opportunity of using pricing strategies

Question 6

Name and describe the 2 groups of pricing strategies

Answer 6

1 market orientated strategies
Business is market orientated when they produce what the market wants and will set price at a level the market is willing to accept

2 cost based strategies
Business are product orientated when they produce goods without reference to consumer needs. They will set price related to cost of producing or supplying the product

Question 7

List the methods of market orientated pricking strategies

Answer 7

1 market skimming
2 market penetration
3 loss leader pricing
4 destroyer pricing
5 going rate pricing
6 psychological pricing

Question 8

What does the type of strategy used depend on

Answer 8

1 type of product
2 product range
3 economic circumstances
4 financial strength of business
5 level of market competition

Question 9

Describe market skimming

Answer 9

1 charge high prices to maximise profit on each item sold for a limited period
2 aim to gain as much profit as possible for a new product while it remains unique in the market
3 depends on having a technological advantage ( each generation of iPhone )or advantage in brand image (Chanel or Ralph Lauren)

Question 10

What are early adopters - how is this linked to technological advances

Answer 10

Willing to purchase products so they can be the first to own - each generation of i phone

Question 11

Describe market penetration

Answer 11

1 aim to gain market share
2 price a product at a low level so consumers and retailers buy in large quantities
3 helps to establish brand loyalty when price does rise
4 if price to low consumers may assume product is poor quality and wont purchase

Question 12

When should this pricing strategy be avoided and why

Answer 12

Initially business may lose revenue
If lifecycle of product is short avoid this strategy as business will not have enough time to recover cost of strategy

Question 13

Describe going rate pricing strategy

Answer 13

1 only option for many small businesses- price takers
2 must sell goods at price broadly in line with price charged by competitors

Question 14

Describe psychological pricing strategy

Answer 14

1 price match what consumers expect to pay
2 consumers feel Thayer are getting value for money
3 helps reinforce company image
4 example is pricing just below a round figure eg 19.99 and shops producing items similat quality to established brand at lower price

Question 15

describe destroyer pricing

Answer 15

1 known as predatory pricing
2 sets prices low enough to drive out competition
3 seen as anti competitive and therefore illegal
4 Microsoft been investigated for this

Question 16

Describe loss leader pricing

Answer 16

1 selling products at a loss with the expectation sales will be generated elsewhere in the business
2 additional sales recoup initial loss and make profit
3 example supermarkets selling bread at a loss to attract customers in

Question 17

List and describe cost base pricing strategies

Answer 17

Pricing is based around cost of production
1 cost plus pricing
2 full cost pricing
3 contribution pricing

Question 18

Describe cost plus pricing

Answer 18

1 profit percentage is added to cost of production - known as mark up
2 if product cost £1 to make there is a mark up of 40% so cost is £1.40

Question 19

What are the advantages and disadvantages of cost plus pricing

Answer 19

Advantages
1 changes in production costs are passed to buyer
2 every good sold makes profit
Disadvantages
1 actions of competitions are usually ignored - can lead to loss of sales
2 if an exporter makes now allowance for currency change which will effect price and orders

Question 20

Describe full cost pricing

Answer 20

1 similar to cost pricing but takes all business costs into consideration
2 each price includes overheads such as administration and marketing costs
3

Question 21

What are the advantages and disadvantages of cost pricing

Answer 21

as with cost pricing but also it can be difficult to work out overhead costs

Question 22

Describe contribution pricing

Answer 22

price based on variable costs plus a contribution towards overheads and profit
2 gives flexibility as different contributions can be made for different products so allows use of price discrimination between different buyer

Question 23

What are the criticisms of cost based pricing

Answer 23

1 takes no account of customer need or wishes
2 if prices set to high sales suffer
3allocating overheads is complex and time consuming
3 does not consider the situation in the marketplace and is to rigid when patterns of demand change