FIN FPX 5710 Assessment 4 Pricing Analysis

Student Name

Capella University

FIN-FPX 5710 Economic Foundations for Financial Decision Making

Prof. Name

Date

Pricing Analysis

Elasticity and Pricing

The market demand curve is established through the combination of individual demand curves and market supply curves, which together facilitate the creation of market equilibrium. In the context of household goods, such as laptops or notebooks, a demand curve is developed to illustrate the correlation between the item’s price and household demand. As the price increases, demand typically decreases, which is reflected in the negative slope of the demand curve. This relationship confirms that an individual can only purchase a non-negative quantity of a product. By aggregating multiple individual demand curves, a comprehensive market demand curve is formed. The downward slope of the demand curve indicates that individuals can only buy positive quantities. The intersection of the market supply and demand curves denotes market equilibrium, representing a balance between the forces of supply and demand within the market (Saylor Academy, 2012).

In a competitive market environment, the optimal scenario allows suppliers to sell as much as they wish while buyers can purchase as much as they desire. Elasticity measures how price fluctuations affect consumer behavior concerning an item. If the demand quantity responds less than the percentage change in price, the product is considered inelastic. The price elasticity of demand can be calculated by dividing the quantity demanded by the absolute value of the price percentage change.

Principles of Producer Theory

Computer manufacturers need to understand how market conditions should influence their pricing and marketing strategies for new products, such as an extra-light notebook computer. When setting prices, producers must account for the costs associated with labor, raw materials, and fixed capital in relation to sales volume. Efficient production practices are essential. Additionally, factors such as economic conditions, competitive landscape, and government regulations play crucial roles in a company’s pricing strategies. A buyer’s perception of value and sensitivity to price changes significantly impacts pricing decisions. It is crucial for firms to assess whether the market price can sufficiently cover variable costs; if not, it may be prudent to refrain from production.

Competition

Competition significantly affects product pricing strategies. If a competitor offers a similar product at a lower price, customers are likely to choose that option. However, companies can cultivate customer loyalty, leading some consumers to be willing to pay a premium for the same product. Although competitors may present similar offerings, several factors, including product quality, customer service, and marketing effectiveness, can influence pricing decisions. Analyzing competitors’ strengths and weaknesses and their responsiveness to consumer needs can aid in developing an effective pricing strategy. Var Street, Inc. outlines three competitive pricing strategies that companies can adopt (VarstreetInc.com, 2018). To justify higher pricing compared to competitors, companies must effectively communicate the added value of their products, such as offering free shipping, extended warranties, or superior technology. Conversely, pricing below competitors is feasible if profit margins remain acceptable. Maintaining similar pricing to competitors can also be advantageous, especially when the company can substantiate the superiority of its offerings.

Economic Conditions

The prevailing economic climate can significantly affect how businesses price their products. In times of recession, rising unemployment rates lead to reduced consumer income, resulting in lower spending. Conversely, inflation may encourage increased consumer spending as employment rises and incomes grow. During economic downturns, even if consumers require a new notebook, they may opt for a more affordable generic option rather than investing in a premium extra-light notebook computer. Decreased sales during challenging economic conditions may also coincide with increased production costs. Consequently, if the economy is struggling, manufacturers might need to lower prices to make extra-light notebooks more appealing compared to when the economy is thriving and unemployment is lower. Therefore, pricing strategies must adapt to reflect changing economic circumstances.

Regulatory Considerations

To mitigate legal risks associated with pricing, companies should adopt a consumer-centric approach to pricing strategies. By employing ethical pricing practices, firms can achieve profitability while adhering to legal standards. The Federal Trade Commission (FTC) and the U.S. Department of Justice enforce antitrust laws that restrict how companies establish pricing. Practices such as price-fixing or enforcing minimum price levels are prohibited. These antitrust laws aim to foster robust competition and protect consumers from anti-competitive practices (FTC, n.d.). Misleading or deceptive pricing strategies, as well as predatory pricing aimed at undermining competitors, are also illegal. However, proving such practices can be complex, as companies may defend their pricing strategies as competitive.

References

Federal Trade Commission. (n.d.). Guide to Antitrust Laws. Retrieved October 9, 2018, from https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws

Saylor Academy. (2012). Market Supply and Market Demand. Retrieved October 4, 2018, from https://saylordotorg.github.io/text_economics-theory-through-applications/s12-01-market-supply-and-market-demand.html

FIN FPX 5710 Assessment 4 Pricing Analysis

Var Street, Inc. (2018, March 12). What is Competitive Pricing? Definition, Strategies & Example. Retrieved October 8, 2018, from http://www.varstreetinc.com/blog/what-is-competitive-pricing-definition-strategies-example/