Product cost sets the lower limits of the price, the utility provided by the product and the intensity of demand of the buyers sets the upper limit. So, in case of inelastic demand, total revenue ………………when price increases
Answers
There are number of factors which affect the fixation of the price of a product. Some of the important factors in this regard are discussed as below:
1. Product Cost: One of the most important factor affecting price of a product or service is its cost. This includes the cost of producing, distributing and selling the product. The cost sets the minimum level or the floor price at which the product may be sold. Generally all marketing firms strive to cover all their costs, at least in the long run. In addition, they aim at earning a margin of profit over and above the costs. In certain circumstance, for example, at the time of introducing a new product or while entering a new market, the products may be sold at a price, which does not cover all the costs. But in the long run, a firm cannot survive unless at least all its costs are covered. There are broadly three types of costs: viz., Fixed Costs, Variable Costs and Semi Variable Costs. Fixed costs are those costs, which do not vary with the level of activity of a firm say with the volume of production or sale. For example, rent of a building or salary of a sales manager remains the same whether 1000 units or 10 units are produced in a week.
2. The Utility and Demand: While the product costs set the lower limits of the price, the utility provided by the product and the intensity of demand of the buyer sets the upper limit of price, which a buyer would be prepared to pay. In fact the price must reflect the interest of both the parties to the transaction—the buyer and the seller. The buyer may be ready to pay up to the point where the utility from the product is at least equal to the
sacrifice made in terms of the price paid. The seller would, however, try to at least cover the costs. According to the law of demand, consumers usually purchase more units at a low price than at a high price. The price of a product is affected by the elasticity of demand of the product. The demand is said to be elastic if a relatively small change in price results in large change in the quantity demanded. Here numerically, the price elasticity is greater than one. In the case of inelastic demand, the total revenue increases when the price is increased and goes down when the price is reduced. If the demand of a product is inelastic, the firm is in a better position to fix higher prices.
3. Extent of Competition in the Market: Between the lower limit and the upper limit where would the price settle down? This is affected by the nature and the degree of competition. The price will tend to reach the upper limit in case there is lesser degree of competition while under conditions of free competition, the price will tend to be set at the lowest level. Competitors’ prices and their anticipated reactions must be considered before fixing the price of a product. Not only the price but the quality and the features of the competitive products must be examined carefully, before fixing the price.
Answer:
Rises
Explanation:
Elasticity of demand-
A measure of a variable's sensitivity to the change in another variable is known as elasticity. This sensitivity is the price change, which is correlated with other factor changes. It is a measurement of how sensitive one economic component is to another from a business and economic perspective.
According to the definition of demand's elasticity, demand changes depending on whether prices are rising or falling. When a product's virtue varies and the price changes, this quality of desire is referred to as elasticity of demand (low or high). The elasticity of demand may have a small or low change sensitivity.
- When PED is greater than 1, a rise in price will result in an increase in overall income. For instance, if PED = -0.3, demand is inelastic to price.
- When PED > 1, a price decrease will result in an increase in overall revenue. PED = -2.5, for instance, indicates that demand is price elastic.
- Demand is considered unitary elastic when the PED coefficient is equal to 1. This means that if prices change, total revenue will stay the same.
Hence, we can conclude that , product cost sets the lower limits of the price, the utility provided by the product and the intensity of demand of the buyers sets the upper limit. So, in case of inelastic demand, total revenue rises when price increases.
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