Final micro economics


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Final micro economics

  1. 1. What is Pricing Value that will purchase definite quantity,weight or other measure of goods/services a price system is any economic system that effects its distribution of goods and services and employing any form of money We need to set price when we have  a new product, or  when we enter a new market with an existing product
  2. 2. Determinants of PriceSupply Demand Shortage of raw materials  Income of Consumer Breakdown of machinery  Type of Product Delays in the transportation  Consumers preferences, of finished goods tastes and desires Hoarding of goods by sellers  change in fashion and technology Supply and demand are not the only determinants of price but simply useful catch-all categories for analyzing, describing the multitude of forces, causes and factors impinging on price
  3. 3. Pricing Objective Short-term profit maximization Short-term revenue maximization Maximize quantity Maximize profit margin Differentiation
  4. 4. Factors affecting Pricing Positioning Demand Curve Cost Environmental Factor
  5. 5. Market Pricing
  6. 6. Market Skimming High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Play station, jewellery, digital technology, new DVDs, etc.
  7. 7. Value Pricing
  8. 8. Value Pricing Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products
  9. 9. Psychological Pricing
  10. 10. Psychological Pricing Used to play on consumer perceptions Classic example – Rs. 9.99 instead of Rs. 10.99! Links with value pricing – high value goods priced according to what consumers THINK should be the price
  11. 11. Price Leadership
  12. 12. Price Leadership In case of price leader, rivals have difficulty in competing on price May follow pricing leads of rivals especially where those rivals have a clear dominance of market share
  13. 13. Influence of Elasticity
  14. 14. Influence of Elasticity Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes  PED = % Change in Quantity demanded/% Change in Price
  15. 15. Influence of Elasticity Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall
  16. 16. Influence of Elasticity Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by something more than 4% Revenue would fall A 9% fall in price would lead to a rise in sales of something more than 9% Revenue would rise
  17. 17. Target Pricing
  18. 18. Target Pricing Setting price to ‘target’ a specified profit level Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost X 100
  19. 19. Marginal Cost Pricing
  20. 20. Marginal Cost Pricing Marginal cost – the cost of producing ONE extra or ONE fewer item of production MC pricing – allows flexibility Allows variable pricing structure – e.g. on a flight from Mumbai to New Delhi – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft.
  21. 21. Marginal Cost Pricing Example: Aircraft flying from Mumbai to New Delhi – Total Cost (including normal profit) = Rs. 15,000 of which Rs. 13,000 is fixed cost* Number of seats = 160, average price = Rs 93.75 MC of each passenger = 2000/160 = Rs 12.50 If flight not full, better to offer passengers chance of flying at Rs 12.50 and fill the seat than not fill it at all!
  22. 22. Penetration Pricing
  23. 23. Penetration Pricing  Price set to ‘penetrate the market’  ‘Low’ price to secure high volumes  Typical in mass market products – chocolate bars, food stuffs, household goods, etc.  Suitable for products with long anticipated life cycles  May be useful if launching into a new market  Example:- The People’s Car-”Tata Nano”
  24. 24. Cost Plus Pricing
  25. 25. Cost Plus Pricing Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output All expenses with profit margin Disadvantage:- ignore the role of consumers ignore the role of competitors Over-pricing & Under pricingExample:- Mineral Water
  26. 26. Contribution Pricing
  27. 27. Contribution Pricing Contribution = Selling Price – Variable (direct costs) Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances
  28. 28. Tender Pricing
  29. 29. Tender Pricing Many contracts awarded on a tender basis in Public Sector Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret  Eg: Bandra Worli Sea Link
  30. 30. Absorption/Full Cost Pricing
  31. 31. Absorption/Full Cost Pricing Full Cost Pricing – attempting to set price to cover both fixed and variable costs Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production
  32. 32. Transfer Pricing TP means the value or price at which transactions take place amongst Associated Enterprises Associated Enterprise concept International Transaction Arm Length Price Transfer Pricing Manipulation
  33. 33. Factors for TPM Internal factors:  Performance Measurement and Evaluation External Factors:  Accounting Standard  Income Tax  Custom Duty  Currency Fluctuations  Risk of Expropriation
  34. 34. Price Discrimination
  35. 35. Price Discrimination Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market
  36. 36. Destroyer Pricing
  37. 37. Destroyer Pricing Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved
  38. 38. Loss Leader
  39. 39. Loss Leader Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at Rs 3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers ‘loss’ on item sold
  40. 40. Pricing Policy Determine primary and secondary market segments Assess the products availability and near substitutes Survey the market for competitive and similar products Examine market pricing and economics Test different price points if possible Monitor the market and your competition continually to reassess pricing
  41. 41. GROUP 8:Bhushan Karade Manish Singh Paras Bajaj Prakash Iyer Prasad Gawde