Chapter 17 - The Nature of Marketing
Lesson Objective: To understand Price Elasticity of Demand
One of the many roles of the Marketing Department is determining prices - which is part of meeting demand profitably.
Note:
The demand for a product is how much of that product customers are willing to buy at a certain price point.
Let's start by understanding how the demand for a product changes following changes in price:
Price, therefore, does influence demand. However, there are other factors influencing the demand for a product:
Population size;
Consumers' income;
Price of substitute goods;
Fashion and taste;
Advertising and promotion spending.
These are all factors considered determinant of demand - all of which can change demand:
Supply is another factor that suffers changes following price variations: companies are willing to supply more of a product if prices raise and less if it goes down:
Therefore, price directly impacts on the supply of a certain product. Other factors also do so:
Costs of production (labour and raw materials);
Taxation (also relates to costs);
Weather conditions and other uncontrollable factors;
Advancements in technology which can potentially drive costs down.
Activity 17.1
These factors changing supply and demand leads us to the equilibrium price:
“The equilibrium price is the point where demand equals supply.”
When in equilibrium an increase in prices would lower the demand for a product leading to:
Excess supply which is a negative effect on sellers/suppliers of that product (stocks, costs, unsold items).
On the other hand, prices lower than the equilibrium price leads to excess demand:
It prevents business from reaching optimum profitability (equilibrium price).
To-Do-List
Activity 17.2
Chapter 17 - The Nature of Marketing
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