Pricing

Question 1

What is price elasticity of demand?

Answer 1

Price elasticity of demand is a measure of the extent of change in market demand for a product in response to a change in its price

If demand is completely unresponsive to changes in price it is said to be completely inelastic

Demand is said to be elastic when it responds to increases or decreases in price

Question 2

What factors effect pricing?

Answer 2

organisational goals
product mix
price/demand relationships
price elasticity of demand
competitors and markets
type of market
product life cycle
marketing strategy
cost

Question 3

Calculation for elasticity of demand ?

Answer 3

% change in quantity demand / % change in price

Question 4

What factors effect elasticity of demand ?

Answer 4

Scope of the market
Information within the market
Availability of substitutes
Complementary products
Disposable income
Necessities
Habit

Question 5

What are the two market structures?

Answer 5

Perfect competition:
Every buyer or seller is a ‘price taker’
Zero entry/exit barriers
Perfect information
Profit maximisation
Homogeneous products

Imperfect competition:
Monopoly
Oligopoly
Monopolistic competition

Question 6

What is the demand curve formula?

Answer 6

Deriving the demand curve
P = a – bQ

P = price
Q = quantity demanded
a = the price at which demand would be 0
b = the amount by which the price falls for each stepped change in demand – relative amount
i.e.(change in price/change in quantity)

A= current price + (current quantity at current price / change in quantity when price changed to b) * the amount by which the price falls for each stepped change in demand

B= change in price / change in quantity

Question 7

Marginal cost is the same as?

Answer 7

Direct and variable costs

Question 8

What is profit maximisation price?

Answer 8

Profit maximisation price
Profit maximised when marginal revenue (MR) = marginal cost (MC)

Marginal revenue = extra revenue from producing one extra unit

Marginal cost = extra cost of producing
one extra unit

Question 9

What is cost-plus pricing?

Answer 9

Estimate direct costs, add % for overheads and add % for profit

Question 10

What are the advantages of cost-plus pricing?

Answer 10

Simple and easy to use
Justification for price rises
Produces stable prices

Question 11

What are the disadvantages of cost-plus pricing?

Answer 11

Ignores demand
Ignores competitors
Ignores distinction between incremental and fixed cost
Selling price depends on how fixed costs are apportioned to products

Question 12

What is marginal cost-plus pricing?

Answer 12

Estimate direct costs and add % for profit

Question 13

What are the advantages of marginal cost-plus pricing?

Answer 13

Simple and easy to use
Just as accurate as full cost as allocate a larger profit %
Gives option to price below total cost
Useful for pricing one-off contracts

Question 14

What are the disadvantages of marginal cost-plus pricing?

Answer 14

Ignores demand
Ignores competitors

Question 15

What is premium pricing?

Answer 15

Involves making a product appear different through product differentiation so as to justify a premium price

Question 16

What is market skimming?

Answer 16

Involves setting a relatively high price for a new product stressing the attractions of new features

Question 17

What is price differentiation?

Answer 17

The strategy to sell the same product to different customers at different prices

Question 18

What is market penetration?

Answer 18

This relates to the attempt to break into a market and to establish that market share which will enable the firm to achieve its revenue and profit targets
Setting an initial low price to achieve a desired level of market acceptance is known as penetration pricing

Question 19

What are loss leaders?

Answer 19

Products deliberately sold at below marginal cost in order to attract customers

Question 20

What is the use of discounts in pricing?

Answer 20

Using discounts to adjust prices

Question 21

What is controlled pricing?

Answer 21

Regulation sought through controlled pricing

Question 22

What is product bundling?

Answer 22

Refers to the offer of further products provided free with the main product that is being bought

Question 23

What are the phases of products lifecycle?

Answer 23

Introductory phase:
Demand low
Heavy advertising

Growth phase:
Demand shows a steady and rapid increase
Cost per unit falls
Attempt to gain market share

Maturity:
Increase in demand slows
Products may be differentiated
Profits lower

Decline:
Sales fall
Price wars start
Losses will be made