CMA USA P-2 S-C
DEMAND SUPPLY AND PRICING:
Ø
Demand :
Law of demand :
As the price increases demand decreases
Price decreases demand increases
It is a downward slope line
Ø
Price elasticity of demand :
It determined how much increases or decreases in price will
have an effect on quantity demand.
It can be calculated in two ways,
1.
Percentage method
2.
Mid-point method [ARC Method]
Ø Percentage method:
Elasticity demand = %change in quantity demand ÷ %
change in price
Ø Midpoint method or ARC method:
ED = [{Q2-Q1}/ [ {Q2+Q1}/2] ÷ {P2-P1}/ [ {P2+P1}/2]
Or
ED= [Q2-Q1] [P1+P2] ÷ [P2-P1][ Q1+Q2]
Ø Classification of the level of elasticity:
1. Perfectly in elasticity:
any price change results in no changes in the quantity demanded.2. Perfectly elastic:
Any changes in quantity demand result in no changes in
price.
3. Unitary elasticity:
Any % change in price will cause the same % change in
demand.
Total revenue= price × quantity
4. Relatively price elasticity:
Any changes in price result in a large % change in demand
[qty]
5. Relatively In elastic:
Any % change in price results in a smaller % change in quantity
demand.
Ø
Supply:
>law of supply:
When price increases supply also increased
When price decreases supply also decreases
Ø Short-run market equilibrium:
PE= equilibrium price
QE= equilibrium supply
Ø Market equilibrium:
It is the point at which demand = supply
It is the point where the demand curve interacts with the supply curve.
Ø
Excess demand :
Demand> supply
Excess supply:
Supply> demand
Any price above the equilibrium price in a market > s>D
>[excess supply]
Firm reduce price>price fall
Ø Pricing strategy:
>factors affecting pricing strategy:
It includes internal and external factors.
Ø Internal factors:
It includes,
1.
Marketing objective
2.
Cost
3.
Marketing mix strategy
Ø External factors:
Market and demand
Competitors activity
Other external factors such as inflation government
regulators technological change etc.
Ø Steps for setting pricing policy:
1.
Setting the pricing objective
2.
Estimate demand
3.
Estimate the cost and offers
4.
Analise competitors' prices, costs, and offers.
5.
Determine the pricing method
6.
Decide on the final price
Ø General pricing approaches:
It includes 3 approaches,
1.
Cost-based approaches
2.
Value-based approaches
3.
Competitors-based approaches
Ø Cost-based approaches:
Product> cost > price> value> customers
Under cost-based approaches, the company calculates the price of its
product based on its cost.
Cost-based pricing include,
Cost +pricing:
Under this method, the company calculates its
cost and adds a standard monetary amount of profit to the cost to calculate the price.
Markup pricing:
1.
Markup on cost
2.
Markup selling price
The markup on cost:
Under this method, the company determines its
cost and then adds a standard markup % of the cost to arrive at the price.
Price= cost + [cost × markup%]
Markup selling price:
Price = cost ÷ 1- markup%
Break-even price: [ not important]
The firm determined a price at which it
will break even [ no profit no loss]
Target profit pricing :
The firm determines a price at which the company
makes a target profit.
Target pricing is based on a forecast of
total cost and total revenue.
Note: target profit pricing and even pricing
do not consider the price-demand relationship.
2. competitors based approach:
Here we considered competitors' actions such as their offer
price etc.
Based on the competitor's action company determines their
price.
It includes,
1. Going rate pricing:
It is most frequently used in a homo generous interest.
That is one where competing firms all sell the same commodity
with little differentiation.
In such a situation competitors will usually all charge the
same price.
It is the method of setting prices based on the price of
competitors.
2. Bidding:
A bid is an offer to exchange specific works or an item for a
specific price it can be an open bid or closed bid.
3. Target pricing and target costing :
Target costing begins with a target selling price based on
customers' demand.
After target pricing has been determined the company calculates the target profit.
Ø 3). Value-based approach:
It is also called buyer-based pricing
Here prices are set according to buyers' perception of the
value of the product.
A value-based approach to pricing:
Customer> price> cost> product
It includes,
1. Everyday low pricing:
It is a strategy where a company promises low prices at all times.
It may encourage the customers to return to the store again and
again because they know prices will be low always.
2. High-low pricing:
It involves charging a high everyday price.
But offering frequent discount and sale.