Chapter 13

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University of Toronto Scarborough
Management (MGM)
Ingrid L.Stefanovic

INTRODUCTION Price is the value that a buyer exchanges for a good or service o Value is ultimately determined by customers Utility is the want satisfying power of a product or service Prices are a mechanism that allows the customer to make a decision Price often serves as a means of regulating economic activity Prices influence a companys profit as well as its use of the factors of production PRICE DETERMINATION Three general approaches to determine price o Price derivation Based on theoretical economic analysis o Cost-plus approach Where the costs of producing the product are determined, and a margin of profit is added on o Marketing approach Built on aspects of the economic-analysis and cost-plus methods, and adds an important marketing dimension to come up with a realistic price PRICE DETERMINATION IN ECONOMIC THEORY The concepts of economic price theory are essential to other pricing approaches, and they apply to almost any pricing situation According to microeconomic approach, or price theory o Assumes a profit maximization objective and leads to deriving correct equilibrium prices in the marketplace Demand refers to a schedule of the amounts of a firms product or service that consumers will purchase at different prices during a specific period Supply refers to a schedule of the amounts of a product or service that will be offered for sale at different prices during a specific time period Market Structures Pure Competition is a market structure in which there is such a large number of buyers and sellers that no one of them has a significant influence on price o Homogeneous product, ease of entry for sellers, complete and instantaneous information Monopolistic Competition is a market structure with a large number of buyers and sellers where heterogeneity in good andor service and usually geographical differentiation allow the marketer some control over price o Customers will form preferences to a companys productservice Oligopoly is a market structure in which there are relatively few sellers o No seller controls the market, high start-up costs , difficult for new entry of seller Oligopsony a market in which there are only a few buyers
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