KEY ECONOMIC FACTOR TO DETERMINE PRICE OF GOOD OR SERVICE AND CIRCUMSTANCES THAT WILL ENABLE THE COMPANY TO PASS ON COST INCREASE TO CUSTOMER AND PROTECT PROFIT PERCENTAGE (1750 words)
Price determination is based equally on demand and offer; it is actually a balance of two market component. This article will first explain key financial price determinant factors such as demand and supply drives and relationship between demand and supply. Secondly, essay will illustrate the disequilibrium created by recent surge in cotton price and also talks about how price discrimination, product differentiation and advertising can allow a company to keep the profit margin by passing on cost increase to the client.
The law of demand areas that larger quantity will be purchased when price lessens, similarly smaller number will be purchased when price increases (ceteris paribus). Perfect example will be discount offer provided for luxurious items; in Bahrain during al hawaj mega clearance deal demand for the perfume will be high anticipated to low price.
Price= Marginal cost
Price > marginal cost(Price Manufacturers)
Elasticity of Demand
Demand is flawlessly Stretchy, as shown in Amount 1. 1
Negative relationship between the Demand and the price tag on the product. With regards to the total earnings curve and demand curve shown in Number 1. 2 elasticity and inelasticity range can be motivated.
Elasticity of demand across different market composition:
Table 1. 1: Comparison Perfect and Imperfect market
Source: Roger LeRoy Miller & Raymond P. H. Fishe (Microeconomics price theory in practice) (Check how to site version)
A larger variety will be offered on the market when price increases (other activities equal); similarly, an inferior amount will be offered on the market when price diminishes (other activities equal). It declares that there is a positive marriage between quantity provided and price. There are various factors such as price of resources; price of related outputs, technology and goals shifts the source curve.
DEMAND AND OFFER Romance: MARKET EQUILLIBRIUM
It occurs at the purchase price where consumer determination to demand exactly matches with that of firm determination to provide. Thus intersection of both demand and offer curve produces the equilibrium price and equilibrium quantity. Establishing market equilibrium price is considered to be one of the key factors.
Source: Began ward
FACTORS TO ASCERTAIN PRICE OF THE PRODUCT:
Quality speaks for itself in the product. Thus quality in conjunction with reasonable price, offers positive financial progress for the organization creating a high-quality product. Infact a company producing high quality products expands new customer platform due to customer referrals and amplification of positive person to person. This will subsequently multiply overtime as the business grows and will lead to upsurge in demand for the product or service. For example, in sensitive areas such as medical, the Center Specialist / Neurosurgeon initially of their medical practice will not overcharge their patients, but over a time period as they gain experience and expand their clients, they increase their service cost substantially. We can also grab another illustration from some other field such as talk about market. Invest the the exemplory case of Google, a company which had become only in 1998, was posted in NYSE in 2004 and the IPO kicked off with just $84. Because of its technology & various marketing methods, the company has grown into a huge internet empire & a blue-chip company. This is simply because of talk about traders who start to see the potential in company due to its raising quarterly income, apart from regular announcements on enhancements and hence are actually pricing its show at an impressive $566 as on 15Nov2010s.
CHANGE IN Style AND Personal preferences OF CONSUMER:
Taste of the buyer impacts the demand for this product. Obviously, if you are in diet you will buy less butter than someone who does like butter. If you once liked butter down the road changed your requirements then, it triggers demand for butter to alter and finally influence the price tag on the product. Thus decline in the desire for the good or service will transfer the demand curve inward as shown in below number. The result on price can be either brief run or long run depending upon the products, for luxury good you will see short term move in demand due to improve in life-style while need good tend to have stable or long run demand curve.
Source: Began ward
Consumer income is one of the key factors influencing the demand and the price tag on the merchandise. The disposable income rises when income boosts and it changes the usage style. Demand of normal products is more during increase when consumer income rises, whereas during recession the income comes, resulting customers deciding on poor or less superior products. This change in consumption pattern which goes up due to the consumer income influences the demand of the merchandise and its price. But there are exceptions, where certain products which are categorized as the autonomous usage demand are always high.
PRICE OF COMPETITOR:
For occasion in Bradford, NOMI SIM cards was widely utilized by expatriate students to make cheap telephone calls (3p per min) to India and it also allowed call charge of 1p per min between 6AM and 6PM. But later on Lyca SIM provided competitive price of 1p for international cell phone calls and this enticed students to choose the replacement product. In large market framework knowing the price tag on rival is important while identifying the price of the product. Thus the supply and the price of complements influence the demand and lastly drive the costs.
PRODUCT LIFE Pattern:
The demand of the Product varies over the several stages of the Product Life pattern. As the demand varies the costs also changes consequently. At each stage of the merchandise life cycle the amount of competitors is different, so this brings about substitutability and differing elasticity's of demand. During the Unveiling, Growth the demand of the merchandise constantly raises and in the second option level of maturity and during decrease level the demand comes and hence the costs will also follow the demand.
Source: Call & Hollahgan, 2008
Innovation markets emergence is a larger phenomenon than technology creation. In addition to a new product, breakthrough creativity creates new markets as well (Crawford 1992). Technology make a difference the resource; infact resource curves are drawn assuming a given technology. As time passes, technology available may change, so if good manufacturing technique is followed then supply curve will always alter towards higher production. Including the supply for Walkman's were high during the mid-nineties and even in the first 2000 but at the advent of MP3 Players and i-Pods the demand for the coffee lover lowered as well the prices of these products and supply eventually wiped them from the market.
Taxes have significant effect on shifting supply and demand curves, which changes the marketplace equilibrium price and variety. Usually when the federal government places taxes on a product, companies find themselves unable to produce the product as quickly for the same cost. As a result of this, the supply goes down in relationship with the size and impact of the duty. For example in below graph supply shift to upwards, thus increasing the price of apple and lowering the product amount.
Supply change: Graph predicts how the market equilibrium price and market quantity of the apple can vary due to improve in tax.
DEPENDING WITHIN THE SUPPLIER PRICE:
In Middle East price of petrol is cheap compare to that of India it is due to easy availability natural material crude olive oil in Middle East. (Any idea what is the current petrol price in Bahrain? It will add more value to my answer).
Current petrol price in Bahrain is 100Fills and in India you can check it from website. Pls please note we have four metros in India and all of them have their own petrol price. Only Union territories such as Pondicherry the fuel costs are less scheduled to less duty on Gasoline.
Demand Curve: Fig. a price change causes activity across the demand curve. Fig. b explains to what happens to demand when the variables such as income, the price tag on complement or expectations changes. Thus the shift popular curve indicates determination to pay either a higher or cheap for confirmed quantity of the good.
Impact of cotton price climb:
RON LAWSON - MD, Logic advisor from California during his interview in NDTV (Aug 24, 2010) commented that usage outpaced development of the cotton. Due to the imbalance between the cotton creation and consumption, cotton stock was reduced to the cheapest levels which lead to increase in price of cotton. As world cotton acreage has declined, production has fallen to 15. 3% in 2009/2010 crop year compare to 2004/05.
Market Disequilibrium: Source Shortage
Due to drop in cotton development, predicted cotton source is considerably below than real demand, below development shows reduction in cotton shares as a % of intake during the season 2010/2011.
Low cotton prices induced production to fall season for the past three years, but the higher prices are anticipated to drive a substantial upsurge in cotton development in 2010/11. Once development is realigned with demand, cotton prices should move again towards their long-term averages.
Below craze shows fluctuations popular for cotton materials during the current period, major factor that cause for fluctuation is because of global and local demand & source, irrigation and farming facilities anticipated to government plans & subsidies.
Presented by Prabhjot Kaur (Vardhman Group is a leading textile conglomerate in India possessing a turnover of $700mn) On Sept 2010.
However for cotton, the main price driver is a source scarcity in China, which exceeded the genuine expectations results. (www. usda. gov/oce/commodity/wasde -- Reason of Changes to USDA's Cotton Source and Demand Quotes for China, November 2010). Thus demand for cotton among dealer outpaced cotton production which led to demand and offer shortage. This shortage can be triumph over by increasing the price tag on cotton which in turn accelerates the cotton production and increases supply to complement with market demand and creates market equilibrium.
Click to Enlarge
Source: Micro economic (Price Theory used)
Soaring cotton price builds up pressure on fashion shop market and because of this of which, NEXT warns the upsurge in price of garment between 5% and 8% and it was predicted to hit the full total sales by 1-2 %. As illustrated below, this situation creates inelastic demand and ends in upsurge in total earnings.
During price rise most of the buyer will decrease their costs by reducing the amount of quanity they afford to buy without compromising on the grade of product. So store when increasing their price they must give attention to products differentiation which escalates the demand for their product in the buyer market and also to grade consumer depending on the taste and preference through price discrimination strategy.
If NEXT improves its price by 8%, then there should be certain band of customer who would still prefer to buy NEXT products so, in this example retailer can generate income by increasing the sales of such branded product by discriminating the purchase price across low income and high income generating customers. This can be done by varing the set and varying cost of the products sold. Price discrimination allows the organization to draw out consumer surplus and also helps them to maintain the profit margin. Below graph illustrates the problem where demand for product in market A(low income consumer) is flexible whereas in market B demand for the product stay inelastic(high income consumer). Income Maximisation occurs when MC=MR.
During price rise, retailer should identify their products from that of other opponents in order increase demand for the product and maximize revenue. In figure 1. 1 it says company will generate the gain selling 200 t-shirts at $25 for differentiating their product by changing the design of shirt, however in monopolistic competition other firms try to compete by delivering new design to the marketplace, in such situation demand curve will change left and touches the common Total Cost as shown in physique 1. 2 thus organization in this case will not create any earnings. Though product differentiation is an integral to revenue generation, advertising is another factor which most of the fashion retailer use to obtain some degree of market control and increase demand and reduce the elasticity of the demand. But during recession it is always important to consider whether the advertising is worth the expense? Any revenue made due to advertising must be measured against the expense of advertising.
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