Price Determination in a Competitive Market

5 Key excerpts on "Price Determination in a Competitive Market"

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  eBook - PDF

  Economics

  Theory and Practice

  • Patrick J. Welch, Gerry F. Welch(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  53 Demand, Supply, and Price Determination CHAPTER OBJECTIVES Explain how demand and supply work using schedules and graphs. Demonstrate how demand and supply interact in markets to determine prices and to show equilibrium price and quantity, shortages, and surpluses in a market. Explain how changes in nonprice factors cause changes in demand and changes in supply. Illustrate how changes in demand and changes in supply affect equilibrium prices and quantities in markets. Illustrate how government‐imposed price ceilings and price floors influence market conditions. Introduce the concept and calculation of price elasticity, which measures buyers’ and sellers’ sensitivities to price changes. Explain how to measure price elasticity. CHAPTER 3 As we noted in Chapter 2, one way societies can make the basic economic decisions is through individual buyers’ and sellers’ actions in markets. Many societies, such as the United States and some countries in Western Europe and Asia, base their economic systems on such market decision making. There are two basic economic tools to study buyers and sellers and their behaviors in the marketplace: demand and supply. Together these tools help us understand the forces at work in a market economy. In this chapter, we explore demand and supply in detail and put the two together to see how they interact to determine the prices of goods and services. 54 Chapter 3 Demand, Supply, and Price Determination DEMAND AND SUPPLY Demand: The Buyer’s Side Demand, in economic terms, refers to buyers’ plans concerning the purchase of a good or service. For example, you might demand an airplane ticket to London, tennis les- sons, or a chemistry lab book. A business might demand workers, raw materials, machinery, or any other factor of production. Many considerations go into determin- ing the demand for a good or service.

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  Essentials of Price Theory

  • Burton Keirstead(Author)
  • 2019(Publication Date)
  • University of Toronto Press

    (Publisher)

  It has also been the cause of numerous mergers and amalgamations in other industries and tends to create monopoly and imperfect competition. We may now return to the problem of price determination under conditions of imperfect competition. Before we ask how prices are determined under these conditions we have to ask a prior question, viz., whether the situation is a determinate one. Let us be clear as to the nature of this inquiry. So far, in our studies of monopolistic and competitive pricing, we have been able to show that, on the basis of our data about the firm's behaviour, forces will operate which will fix price at certain equilibrium points. The problem of price under those conditions is clearly determinate; there are suffi-cient givens to enable us to solve the problem of where prices will be fixed. But when we approach our present problem of pricing under conditions of monopolistic competition, we have to inquire very carefully if our data are sufficient to enable us to solve the problem of where price will be fixed. We may take as our example the classic case of duopoly. Duo-poly is the special oligopolist situation which exists when only two firms share the market. Each firm will try to maximize its net profits. When there is only one firm in the market this maximi-zation is immediately possible. When there are two firms it is only possible if each firm proceeds on the assumption that any change in the quantities he offers on the market or of the price at which he will sell will have no effect on his rival. If the two firms operate on this assumption about each other's behaviour each will behave as though it were a monopoly in a section of the market. Since there can be only one price in the market, the two firms will continuously readjust their outputs until they have divided the market in the proportion determined by the proportion of their outputs at the optimum point.

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  Available until 8 Feb |Learn more

  N4 Economics

  • L Engelbrecht, A Strydom, L Engelbrecht, A Strydom(Authors)
  • 2014(Publication Date)
  • Future Managers

    (Publisher)

  In such markets, the buyer and seller do not have market power which would enable one to manipulate the other. Perfectly competitive markets have the following characteristics: • Number of buyers and sellers : there are literally thousands of participants in the market resulting in much choice. • homogenous product : The products being offered by sellers are identical or uniform. • there is perfect information : Buyers and sellers know everthing about the characteristics of the product and can easily compare the prices of sellers. • No barriers to entry or exit : Buyers and sellers can enter and leave the market at will. No licencing approval or other restrictions prevent a seller from competing. • Sellers are price takers : as sellers have no market power, they are forced to take the price determined by the market. This ensures an acceptably low price for buyers. 2.1 Demand 2.1.1 Description Demand is the quantity of a good or service that a consumer is willing and able to purchase at a given price, place and time ceteris parabus (all things being equal). Figure 2.1 Composition of a market How the markets work 21 FutureManagers 2.1.2 What determines the quantity demanded Numerous factors influence the demand for a good or service. The price of the product The price of the good will determine the quantity which the consumer is willing and able to purchase. The law of demand dictates that buyers will always demand more at a low price and less at a high price. The prices of other products As the price of related goods changes, so does the consumer’s ability and willingness to purchase the good in question. This is because related goods have an effect on demand for the good in question. Such related goods can be: Complementary These are goods that are consumed together (in conjuction)with other goods. Such goods are dependent on each other. Examples are cars and petrol or computers and printers.

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  Management of Marketing

  • Paul Reynolds, Geoff Lancaster(Authors)
  • 2005(Publication Date)
  • Routledge

    (Publisher)

  Consumers (both final consumers and other manufacturers) can easily compare selling prices, but this does not give any proper insight into competitive manufacturing pricing structures, as it relates to various members of the marketing channel. Buyers can compound this difficulty by ‘inventing’ ‘special prices’ and ‘non-existent discounts’, not really offered by competitors, but stated as being real during the negotiation process to help when bargaining for a lower price.

  When products are easily initiated and markets are relatively easy to enter, the price of existing or potential competitive products assumes major importance. Even when products have substantial distinctiveness, it is not usually too long before other companies will enter the market. Competition stems from three major sources:

  1. ‘Head-on’ competition from directly similar products.
  2. Competition from substitute products.
  3. Competition from products that are not directly related, but which compete for the same disposable income. For instance, watch manufacturers are often in competition with fountain pen manufacturers because their products are often bought as gifts. Hand knitting is mainly a leisure activity, so yarn producers face competition from other ‘hand-craft’ hobbies to seek the potential customer’s free time. This aspect of competition is often overlooked when setting prices.

  7.4.4 Market Share Analysis

  If the company is seeking a significant market share, the price for the product will need to be competitive. Management should ensure that production capacity is sufficient to meet demand that this anticipated market share might create. If production capacity is limited, there is little point in setting low prices that might attract orders that cannot be fulfilled.

  The steps discussed so far in price determination have been concerned with the market place, rather than the internal workings of the firm. Market considerations should be the major determinant of price, so it would be illogical to develop a product whose price did not fall approximately in line with competitive prices. The level of potential demand at given price levels is, therefore, an important consideration. Marketers sometimes charge low prices to make profit else where. Many supermarkets have a few products that are very cheap which act as so called ‘loss leaders’ and draw customers into the store. It is the total profit on the shopping ‘trolley’ of goods that management is really interested in. By using loss leaders and changing higher prices on other goods that consumers are less aware of or familiar with the supermarket can increase its total profit per customer (see Eastham, 2002

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  eBook - PDF

  Marketing, 5th Student Edition

  • James Burrow(Author)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 14.1 | The Economics of Price Decisions 393 We know that effective marketing results in satisfaction for both the con- sumer and the business. A satisfactory price means that the consumer views the purchase as a value. It also means that the business makes a profit on the sale. The Importance of Price to Consumers People make many decisions about what to buy based on price. Their satisfaction with purchases often relates to the prices they pay. But they don’t always consider the lowest price to be the best price. For exam- ple, a no-frills airline with low ticket prices may not appeal to a business traveler who needs assurance of a reliable schedule and comfort. You can probably think of many products you buy that could be purchased at a lower price. Why do you decide to pay a higher price for them? The Importance of Price to Businesses Prices of products and services are as important to businesses as they are to con- sumers. The price determines how much money a business will make to cover the costs of planning, producing, and market- ing. If the price is not high enough to pay those costs and generate a profit, the busi- ness will not be able to offer that product or service for long. Price is an important tool because it can be changed more easily than other marketing decisions. Once a product is designed and produced, it is difficult to change its form or features. When pro- ducers, wholesalers, and retailers establish a distribution channel, it will be difficult to change where consumers can purchase that product.

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