Method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on the customer's perceived value of the product in comparison to his or her perceived value of the competing products. Different pricing methods place varying degree of emphasis on selection, estimation, and evaluation of costs,comparative analysis, and market situation.
Cost-Plus Pricing
Average cost pricing is defined as where a firm charges a price explicitly with reference to average costs plus a percentage profit mark-up.
Predatory Pricing
Predatory pricing is defined as a situation where a firm is prepared to deliberately make a loss in the short run with the aim of driving a rival(s) out of the market. In the long-run this will enable the firm to raise its price more than it has previously been reduced.
Limit Pricing
Limit pricing can be defined as a situation where an established firm tries to forestall new entry in a situation typically where economies of scale exist.
Non-price competition
Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship". The firm can also distinguish its product offering through quality of service, extensive distribution, customer focus, or any other sustainable competitive advantage other than price. It can be contrasted with price competition, which is where a company tries to distinguish its product or service from competing products on the basis of low price. Non-price competition typically involves promotional expenditures, (such as advertising, selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs.
Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price, and avoids the risk of a price war.
Although any company can use a non-price competition strategy, it is most common among oligopolies and monopolistic competition, because firms can be extremely competitive.
ELASTICITY
In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a unitless way. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution.
Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of the firm, and distribution of wealth and different types of goods as they relate to the theory of consumer choice. Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus, producer surplus, or government surplus.
There is two type of elasticity
Price elasticity of demand
price elasticity of supply
Price elasticity of demand (PED or Ed)
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income).
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.
Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.
PED is derived from the percentage change in quantity (%ΔQd) and percentage change in price (%ΔP)
PED is a measure of responsiveness of the quantity of a good or service demanded to changes in its price.[1] The formula for the coefficient of price elasticity of demand for a good is:
Ed= %change in quality demanded = ΔQd/Qd
%change in price ΔP/P
Factors Affecting Demand Elasticity
There are three main factors that influence a demand's price elasticity:
The availability of substitutes - This is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be.
Amount of income available to spend on the good - This factor affecting demand elasticity refers to the total a person can spend on a particular good or service. Thus, if the price of a can of Coke goes up from $0.50 to $1 and income stays the same, the income that is available to spend on coke, which is $2, is now enough for only two rather than four cans of Coke. In other words, the consumer is forced to reduce his or her demand of Coke.
3. Time - The third influential factor is time. If the price of cigarettes goes up $2 per pack, a smoker with very few available substitutes will most likely continue buying his or her daily cigarettes. This means that tobacco is inelastic because the change in price will not have a significant influence on the quantity demanded.
PRICE ELASTICITY 0F SUPPLY (PES)
In economics, price elasticity of supply (PES) is an elasticity defined as a numerical measure of the responsiveness of the supply of a given good to a change in the price of that good.
Price elasticity of supply is a measure of the sensitivity of the quantity of a good supplied in a market to changes in the market price for that good, ceteris paribus.
As per the law of supply, it is posited that at a given price and corresponding quantity supplied in a market, a price increase will also increase the quantity supplied. PES is a numerical measure (coefficient) of by how much that supply is affected. Mathematically:
Question 1(b). Visit a local market or departmental store. Focus on the section where floor cleaning detergents are displayed for sale.
Observe and analyze the space allocated, brands, different brands under the same company, pricing, etc. Elaborate on the economic concepts based on your observation and learning.
