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Amna Qayyum

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Introduction

Amna Qayyum Examine the factors which determine how businesses price their products. Various factors have to be taken into account when a firm sets a price for its products. First of all the firm has to work out the price elasticity of demand (PED) for it's product. If the PED is less than one (inelastic) then the firm should set a higher price in order to maximize revenue, however if the PED is greater than one (elastic) then the firm should set a low price in order to maximize revenue. The firm will also have to see which competition structure it is operating in. If is Perfect Competition then the firm are price-takers, and they can sell as much as they want to at the going rate, which is determined by the intersection between the Demand and Supply curves. If the firm is operating in a monopoly, then it is a price-maker, and can charge as much as it wants to because of lack of close substitutes. ...read more.

Middle

A pricing policy also depends on the state of an economy. If the country is facing a boom, there are low taxes or interest rates, the consumers have more disposable income and can afford to pay a high price, but the firm will only set a high price if the competitors are doing it too. Conversely if there is a recession in the economy, high taxes and interest rates or a high level of inflation, consumers will have less spending power and would spend money on inferior and low-priced good. In Pakistan, where 50 Million people live below the poverty line and inflation for the month of February was 10%, there is more demand for low priced products. If the firm is importing raw material, and the currency appreciates the firm will have to set a lower price. A firm also has to bear in mind its position in the market when pricing a product. If it is a market leader and has a large market share, it can charge a high price because it may have a good reputation and customer loyalty. ...read more.

Conclusion

If there is a price floor (minimum price) or ceiling (maximum price) then the firm cannot exceed these. Using the BCG matrix a firm will have to see what type of a product it is and follow the respective strategy, if it is a cash-cow or star a high price can be set. But if it is a dog or problem child a low price should be kept. A firm can see the lowest possible price it can set through marginal costing, and this can be used in sales and discounts. A firm will also have to bear in mind its production method. If the good is being mass produced and is standardized by the flow method, then the company must be reaping technical and purchasing economies of scale, and a low price can be set. However if the good is customized through job or batch production, and offers variety, a high price can be charged. This can be seen through the difference in the prices of Suzuki cars, which are mass produced and Aston Martin cars, which are tailored to a consumers needs. Keeping these factors in mind a decision can be made. ...read more.

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