3. Pricing policies. . (Threshold, Unit 3)

Market prices are determined by the interaction of supply and demand. Companies’ pricing decisions depend on one or more of three basic factors: production and distribution costs, the level of demand, and the prices (or probable prices) of current and potential competitors. Companies also consider their total objectives and their consequent profit or sales goals, such as obtaining maximum income, or maximum market share, etc. Pricing strategy must also consider market positioning: quality products generally require “prestige pricing” and will probably not sell if their price is thought to be too low.

Firms with excess production capacity, a large stock, or a falling market share, tend to cut prices. While firms experiencing cost inflation, or in urgent need of cash, tend to raise prices. A company faced with demand that exceeds its possibility to supply is also likely to raise prices.

Demand is said to be elastic if sales respond directly to price variations. When sales remain stable after a change in price, demand is inelastic. Although it is an elementary law of economics that the lower the price, the greater the sales, there are numerous exceptions. For example, price cuts can have unpredictable psychological effects: buyers may believe that the product is faulty or of lower quality, or will soon be replaced, or that the firm is going bankrupt, etc. Similarly, price rises convince some customers that the product must be of high quality, or will soon become very hard to get hold of, etc! A potential customer seeing a price of $499 will register the $400 price range rather than the $500. This is a psychological effect that many sellers count on. Such technique is known as “odd pricing”.

Actually most customers consider elements other than prices when buying something: the “total cost” of a product can include operating and servicing costs, and so on. Since price is only one element of the marketing mix, a company can respond to a competitor’s price cut by modifying other elements: improving its product, service, communications, etc. Reciprocal price cuts nay only lead to a price war, good for customers but disastrous for producers who merely end up losing money.

Whatever pricing strategies a marketing department selects, a products selling price generally represents its total cost (unit per cost plus overheads) plus profit or “risk reward”. Overheads are the various expenses of operating a plant that cannot be charged to any one product, process or department, which have to be added to prime cost or direct cost which covers material and labour. Cost accountants have to decide how to allocate or assign fixed and variable costs to individual products, processes or departments.

Microeconomists argue that in a fully competitive industry, price equals minimum average cost equals break-even point.

4. A Nation’s Economy. Economic indicators. (Overview, Unit 3: 3.1, 3.6)

Analyzing a national economy involves many factors, some of which cannot be measured by data. One measure of an economy’s success that helps planners to make prediction about the future of the economy is gross national product.

Economists study different sides of the economy in different ways. Microeconomics is the part of economics that analyzes specific data affecting an economy. Macroeconomics is the branch of the economics that analyzes interrelationships among sectors of the economy.

Microeconomists use various methods to measure the performance of the economy. Statistics measure gross national product, or GNP, which is the value of all goods and services produced for sale during one year. All the goods and services produced must be counted, and their value determined.

First, only goods and services produced during a specific year are counted. Second, not every good or service produced or sold during the year can be counted. For example, if both the flour the baker used and the bread produced were counted, the flour would be added in twice and so exaggerate the gross national product. To avoid this problem, economists count a product or service only in its final form. They count the baker’s flour in its final product form – as a loaf of bread or cake. Products in their final form are called final goods and services. Third, GNP includes only goods sold for the first time. When goods are resold or transferred, no wealth is created.

One way in which economists measure GNP is the flow-of-product approach. Using this method, they count all the money spent on goods and services to determine total value. Each time a new product is sold, GNP increases.

Spending for products falls into four categories. The first, and the largest, consumer spending, includes all expenditures of individuals for final goods and services. The second category includes all spending of businesses for new capital goods. The third category includes spending of all levels of government. The fourth category is net exports of goods and services.

Another way of determining GNP is the earnings-and-cost approach. This method accounts for all the money received for the production of goods and services, it measures receipts. To help predict expansion or contraction of the economy, government economists identified a number of indicators. They fall into three categories: leading, coincident and lagging. Leading economic indicators rise or fall just before a major change in economic activity. The leading indicators include information about the number of workers employed, construction activity, and the formation of new businesses. Coincident economic indicators change at about the same time that shifts occur in general economic activity. Lagging economic indicators rise or fall after a change in economic activity.