Economic Theory of Pricing

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Demand and market.

Economic theory suggests that the volume of demand for a good in the market as a whole influenced by variables such as the following.

-The price of the good

-The price of other goods

-The size & distribution of household of income

-Expectations

-Obsolescence

-The perceived quality the product

-Tastes & fashion

Demand and the individual firm.

The volume of demand for one organization’s goods rather than another’s influenced by three principal factors: product life cycle, quality and marketing.

Product life cycle

Phase description

Introduction the product is introduced to the market. Heavy capital expenditure will be incurred on product development and perhaps also on the purchase of new fixed assets and building up stocks for sale. On its introduction to the market, the product will begin to earn some revenue, but initially demand is likely to be small. Potential customers will be unaware of the product or service, and the organization may have to spend further on advertising to bring the product or service to the attention of the market.

Growth

The product gains a bigger market as demand builds up. Sales revenues increase and the product begins to make a profit. The initial costs of the investment in the new product are gradually recovered.

Maturity

Eventually, the growth in demand for the product will slow down and it will enter a period of relative maturity. It will continue to be profitable. The product may be modified or improved, as a means of sustaining its demand.

Saturation & decline

At some stage, the market will have bought enough of the product and it will therefore reach ‘saturation point’. Demand will start to fall. For a while, the product will still be profitable in spite of declining sales, but eventually it will become a loss maker and this is the time when the organization should.

Decide to stop selling the product or service, and so the product’s life cycle should reach its end.

The life expectancy of a product will influence the pricing decision. Short-life products must be quite highly priced so as to give the manufacturer a chance to recover his investment and make a worthwhile return. This is why fashion goods and new high technology goods, for example, tend to have high prices.

Quality

One firm’s product may be perceived to be better quality than another’s, and may in some cases actually be so, if it uses sturdier materials, goes faster or does whatever it is meant to do in a better’ way. Other things being equal, the better quality good will be more in demand than other versions.

Marketing

You may be familiar with the ‘four ps’ of the marketing mix, all of which influence demand for a firm’s goods.

o Price

o Product

o Place refers to the place where a good can be, or is likely to be, purchased.

o If a good is difficult to obtain, potential buyers will turn to substitutes.

o Some goods have no more than local appeal

o Promotion refers to the various means by which firms draw attention to their products and services.

A good brand name is a strong influence on demand.

Demand can be stimulated by a variety of promotional tools, such as free gifts, money off, shop displays, direct mail and media advertising.

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Source by Randika Lalith Abeysinghe