SUPPLEMENTARY READING

Price in economics and business is the result of an exchange and from that trade we assign a numerical monetary value to a good, service or asset. If Alice trades Bob 4 apples for an orange, the price of an orange is 4 apples. Inversely, the price of an apple is 1/4 oranges.

Price is only part of the information we get from observing an exchange. The other part is the volume of the goods traded per unit time, called the rate of purchase or sale. From this additional information we understand the extent of the market and the elasticity of the demand and supply.

The concept of price is central to microeconomics where it is one of the most important variables in resource allocation theory (also called price theory). Price is also central to marketing where it is one of the four variables in the marketing mix that business people use to develop a marketing plan.

In general terms price is the result of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller).

Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange:

Example - Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction. Finally, while product pricing is a main topic for discussion when a company is examining its overall profitability, pricing decisions are not limited to for-profit companies. Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not as apparent. For instance, charities seeking to raise money may set different “target” levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits. While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value

A market is any one of a variety of different systems, institutions, procedures, social relations and infrastructures whereby person’s trade, and goods and services are exchanged, forming part of the economy. It is an arrangement that allows buyers and sellers to exchange things. Markets vary in size, range, geographic scale, location, types and variety of human communities, as well as the types of goods and services traded. Some examples include local farmers’ markets held in town squares or parking lots, shopping centers and shopping malls, international currency and commodity markets, legally created markets such as for pollution permits, and illegal markets such as the market for illicit drugs.

In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influence its price. This influence is a major study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand. There are two roles in markets, buyers and sellers. The market facilitates trade and enables the distribution and allocation of resources in a society. Markets allow any tradable item to be evaluated and priced. A market emerges more or less spontaneously or is constructed deliberately by human interaction in order to enable the exchange of rights (cf. ownership) of services and goods.

Historically, markets originated in physical marketplaces which would often develop into — or from — small communities, towns and cities.

UNIT5

WHAT ARE INFERIOR GOODS?

An Inferior Good is a good for which demand decreases as our income increases. Inferior goods are often of lower quality -- things that we would not yearn for if we could afford a better alternative. So, when we happen upon a higher income, our desire for these inferior goods decreases. For example, as our income goes up, we tend to buy less lower quality fast food and more nutritious imported gourmet food, because we can now afford the higher-quality preferable good.

Inferior goods differ from normal goods. Normal goods are goods for which an increased income leads to increased demand for the good. Examples of normal goods are the "nutrituious imported gourmet food" mentioned above and luxury cars. (The demand for luxury cars increases as income increases.)

Example of an Inferior Good

John is a poor college student, with his only source of income coming from his campus job leading tours at Case Western Reserve University. He gets paid $10 an hour, but he only gives two 1 hr. tours a week. With an inadequate college meal plan, John feels his money would be best spent on more (cheap) food -- mainly "budget" goods, such as instant macaroni-and-cheese and MacRonald's fast food burgers. He rarely treats himself to a meal from the ChocoCake Factory. With his current $20 a week, he typically decides to use his money to buy six packets of macaroni-and-cheese (at $2 a pack) and one meal at the ChocoCake Factory (at $8 a meal).

(Right now, John is spending $12 a week on mac-and-cheese and $8 a week on meals at the ChocoCake Factory)

When John graduates and finds a high paying job, his lifestyle changes and he is now a consumer of more normal goods. He now works as Assistant to the Professor of Microeconomics at CWRU, and earns a stunning $40 a week -- double what he was making as a lowly freshman tour guide. On a regular basis he now consumes 4 meals a week at the ChocoCake Factory and only buys four packets of macaroni-and-cheese.

(John is now spending $8 a week on mac-and-cheese and $32 a week on meals at the ChocoCake Factory)

From his new consumption pattern post-graduation, we can conclude that cheap macaroni-and-cheese is an inferior good; even though John's income increased, he chose to consume less macaroni-and-cheese.

Understanding how to set pricesis a key element to your pricing strategy. To set a price for your product or service you need to know your market and your competition, know what the demand, and understand the price elasticity of demand for your product or service.

Setting prices is also affected by how unique or differentiated your product is; in other words, is it a commodity item or a specialty or niche item? And then, most importantly, do your customers value the differentiation?

Price Sensitivity

Part of your strategy in building price must be to consider price sensitivity. This is particularly important when you are introducing new products or services to the market – and, when you are changing price (that is, increasing or decreasing price).

The market is less sensitive when the product is unique or differentiated and has high value; price increases in this scenario do not affect demand.

The market is more sensitive when the product or service is easily substituted for a more economically priced alternative; price increases in this scenario would affect demand negatively.

The market is less sensitive when products have quite different qualities and are therefore hard to compare to each other; price increases in this scenario often do not affect demand.

The market is less sensitive, and relatively inelastic, when the cost of switching from one product to another involves significant cost (penalties for moving to another supplier - such as breaking a lease).

The market is less sensitive to price when the product is a necessity, as compared to a discretionary item.

Date: 2015-12-11; view: 732