Question

Discuss the role of cost and demand factors in price determination

Answer 1

Answer: The role of cost and demand factors in price determination are:

A.Market Versus Firm Elasticity:

Price elasticity of demand is a measure of the degree to which buyers are sensitive to price chang­es.

In any market characterised by several function­ally substitutable products, there are actually two demand schedules:

1.)ADVERTISEMENTS:

(1) Demand for the general product (primary demand) and

(2) Demand for the firm’s specific offering (secondary demand).

In gen­eral, secondary demand is found to be more price elastic. But a seller may sometimes mistake rela­tively inelastic market or primary demand as elas­tic secondary demand.

2.)Demand for Buyer’s Output:

The market for buyer’s products may actually be price-elastic. So a reduction in price by a firm would raise demand for its product. Hence, manu­facturers selling to such buyers, and whose product represents a significant position of these buyers’ product costs may curtail sales opportunities by eliminating discounts or low-margin products.

3.)Likelihood of Competitive Entry:

K. B. Monroe has pointed out that “an emphasis on high-price strategies may encourage the entry of competitors when entry barriers are minor and when demand is actually price-elastic. Moreover, continued high prices or rapidly increasing prices may force buyers to reconsider their needs and, per­haps, actively seek out competitive substitutes”.

4.)Demand Consequences of a Product Line:

Most firms sell a wide variety of products re­quiring a variety of different marketing strategies. Within a product line there are usually some prod­ucts that are functional substitutes for each other and some products that are functionally comple­mentary.

For example : a photographic product line includes such items as cameras, films, flash bulbs, projectors, screens and other accessories. Because of the demand interrelationships and because there are usually several price-market targets, the prod­uct line pricing problem throws a major challenge before the marketing executives.

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