Price

Demand

Demand is the willingness and ability of an individual to purchase a product at a given time
The demand for a product varies with how much it is charged for
Demand and price are inversely proportional- so if prices increase, demand decreases and vice versa
Price elasticity of demand (responsiveness of demand to price change) must be taken in consideration, since demand for some products are very sensitive to price changes while others are not

Factors Affecting Position of Demand Curve:

price of product itself
price of substitute products: if there are more substitutes, demand for a product will fall and curve shifts to the left
price of complimentary goods: if products tend to be bought and sold together, their prices and demand will be dependent on each other- if price of one increases, the demand for the both will fall and curve will shift to the left
changes in income: if the consumers’ income falls, the demand falls and curve shifts to the left
changes in taste and fashion: popularity of a product determines its demand
change in advertisement: successful advertisement can increase demand and shift the curve to the right

Supply

The supply of a product also varies with the price, but here the relationship is directly proportional. That means when price increases, the supplier chooses to take advantage of the situation and increases supply. Same goes for price decrease which results in supply decrease.
Price elasticity of supply (responsiveness of supply to price change) must be taken in consideration, since supply for some products are very sensitive to price changes while others are not

Factors Affecting Position of Supply Curve:

changes in the costs of supplying the product to the market: an increase in costs will make it more expensive to supply the goods to the market and so supply will fall; moving the curve to the left
improvement in technology: it will become cheaper to produce, therefore increasing supply and shifting the curve to the right
taxes: higher taxes will increase the total cost, therefore decreasing supply and shifting the curve to the left
climate and weather: the supply of agricultural products is very sensitive to changes in weather. Good weather will result in a good harvest, higher supply and moving the curve to the right- it is the opposite for a bad harvest.

Market Price

For the market price to be decided, the supply curve and demand curve must be put together on the same graph
Where they cross is where the demand for the product equals the supply of the product to the market and this will give the market price

Pricing Strategies

Price will not just be determined by demand and supply. The producer will have a lot of influence on the price.

Low-price Strategies

1. Penetration Pricing:

when price is set lower than the competitors’ prices in order to be able to enter a new market
it ensures that sales are made and the new product enters the market
the firm may be able to obtain a large market share
however
sales revenue may be low

2. Competitive Pricing [Below-the-Line/ Predatory Pricing]:

product is priced in line with or just below competitors’ prices to try and capture more of the market
sales are likely to be high as price is realistic and not over- or under- priced
however
a lot of research is needed on competitors’ prices which costs time and money

3. Promotional Pricing:

4. Capturing Pricing:

if a company is making a range of products that are linked in some way, it may sell one product at a high price and the other at a lower price

5. Loss Leader:

selling a product at below the cost or very low profit margin in order to attract new consumers and increase market share

High-price Strategies

6. Price Skimming:

a high price is set for a new product on the market
it us usually used for a new invention or a new development of a product
people are willing to pay high prices because of the novelty factor
the high price may be due to high R&D cost or because of the high quality of the product
it helps create an image of good quality for the brand
high income people will purchase it for the status symbol appeal
however
it may put off some potential customers because of the high price

7. Price Maximization:

when there is a great demand for a product/service with a short lifecycle, the manufacturer will try to maximize profits by charging high prices

8. Premium Pricing [Prestige Pricing]:

when a firm regards its products as the best in the market, it charges high prices

Other Strategies

9. Psychological Pricing [Odd Pricing]:

when particular attention is paid to the effect that the price of a product will have upon the consumers’ perceptions of the product
this may involve charging very high prices for a high quality product so that high income customers wish to purchase it as a status symbol
it could also involve charging a price for a product which is just below a whole number so that it creates the impression of being much cheaper
supermarkets may charge low prices for products purchased on a regular basis therefore creating the impression of being given a good value for money

10. Discrimination Pricing:

11. Market Pricing/ Price Taker

12. Cost-Plus Pricing [Full Cost Pricing]:

Business Studies IGCSE