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MGMA01H3 (184)
Chapter 13

Chapter 13

6 Pages
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Department
Management (MGM)
Course Code
MGMA01H3
Professor
Ingrid L.Stefanovic

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INTRODUCTION
Price is the value that a buyer exchanges for a good or service
oValue 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
oPrice derivation
Based on theoretical economic analysis
oCost-plus approach
Where the costs of producing the product are determined, and a margin of profit
is added on
oMarketing 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
oAssumes 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
oHomogeneous 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 and/or service and usually geographical differentiation allow the
marketer some control over price
oCustomers will form preferences to a company’s product/service
Oligopoly is a market structure in which there are relatively few sellers
oNo 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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Monopoly is a market structure with only one seller of a product with no close substitutes
oRegulated monopolies, such as public utilities, are granted by government in markets
where competition would lead to an uneconomic duplication of services
oSome long-standing monopolies in recent years , such as electricity providers, are losing
their monopoly status
Revenue, Cost, and Supply Curves
Revenue Curve is simply the amount of revenue earned by selling a particular quantity of a
product at a particular price
Average Revenue = Total Revenue / Quantity
Marginal Revenue = Change in Revenue / Change in Quantity
Average Cost = Total Cost / Quantity
Average Variable Cost = Total Variable Cost / Quantity
Average Fixed Cost = Total Fixed Cost / Quantity
Marginal Cost = Change in Total Cost / Change in Quantity
The marginal cost curve intersects the average variable cost and average cost curve at their
minimum point
In short run
oFirm will operate when price falls below AC, provided it remains above AVC
Supply Curve is the marginal cost curve above its intersection with average variable cost
The Concept of Elasticity in Pricing Strategy
Elasticity is a measure of the responsiveness of purchasers and suppliers to changes in price
oPrice elasticity of demand is the percentage change in quantity divided by percentage
change in price
Elasticity Terminology
Elastic means that demand/supply are sensitive to price changes
Inelastic means that demand/supply are insensitive to price changes
Perfectly inelastic occurs when demand/supply does not change at all when price changes
Unit Elastic is when the change in price and change in quantity move in equal amounts
oExample: 1% change in price, leads to a 1% change in quantity
Determinants of Elasticity
Availability of Substitutes
oIf a product or service has close substitutes, the demand tends to be elastic
oIf a product or service doesnt have close substitutes, the demand tends to be inelastic
Complements
oIf a product or service has important complements, than it tends to be inelastic
Example: demand for motor oil is inelastic because its a complement to
gasoline
Necessities and Luxuries
oLuxuries tend to be elastic
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Description
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 www.notesolution.com
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