Transcript Price Elasticity of Demand

Progression
Diploma
Marketing:
4P’s – Price
Pricing Considerations
Customers & Consumers
Demand & Price Elasticity
Laws & Regulations
Pricing Decision
Channels of Distribution
Competitors
Price – Considerations
Golden rule = firms will usually charge the highest price that consumers are
prepared to pay
 Customers - Law of Demand =
– as the price increases the quantity demanded by consumers will fall
– as the price decreases the quantity demanded by consumers will rise
This is for 2 reasons = at a lower price more people can afford the
product + it becomes cheaper compared to its substitutes.
.....you buy more of something when it’s cheaper.

Producers - Law of Supply =
– as the price increases the quantity supplied increases and vice versa.
This is because at high prices even inefficient producers can make a
profit so they can provide a large supply
.
...firms will make more if they can get a good price.
 Equilibrium –
– where Producers and Consumers agree on the quantity and price to be
exchanged. The point where they agree is called the equilibrium.
Price Elasticity
Price Elasticity of Demand is about how much demand changes
in response to changes in price:
Price elasticity of demand = % change in quantity demanded
% change in price

Price elastic products = have a large % change in demand for
a small % change in price

Price inelastic products = have a small % change in demand
for a big % change in price
Price elasticity of demand is always negative. Because a
positive change in price causes a negative change in
demand and a negative change in price causes a positive
change in demand
Pricing Strategies-Market Led Methods

Penetration Pricing
– low price when product is new to gain interest, leads to high demand.
– Once established, price increased.

Skimming – (Opposite to penetration pricing).
– High price to begin with making product desirable to large income people.
– Price lowered once established to help become a mass market product.

Loss Leader (AKA Product Mix Pricing)
– Goods/services deliberately sold below cost to encourage sales elsewhere Purchases of other items more than covers ‘loss’ on item sold.

Destroyer Pricing (AKA Predatory pricing).
– Low prices charged knowingly unprofitable to drive out competitors,
then prices raised.
– Can get into trouble with Office of Fair Trading =anti competitive.


Psychological Pricing – Used to play on consumer perceptions - priced
according to what consumers THINK should be the price e.g.£9.99 not £10.00
Competition Pricing – Charge similar prices to other firms. Example
petrol
Paired Task

Using the last slide – give examples of
companies/brands that would use each
Pricing Strategy.
Pricing Strategies-Cost Plus
Pricing
Firms use this when they are not in price
competition with others. There are 2
main ways it can be done: Percentage mark up -mark up is a %
of the cost of making the product.
 Profit margin – is a set % of the
selling price e.g. A business always
says that it will make 40% on every
product it sells.
Individual Exercise

Read the attached handout and answer
the questions at the end.
Next Weeks - Work

Promotion: See attached worksheet