Inelastic demand is when there is a necessity as opposed to wanting the product. Some other products that I can think of that have an inelastic demand are home heating oil, rent, and prescribed medication. I believe that all of these have an inelastic demand because they are a necessity because everyone needs it for survival. For example, I do not think that anybody would be able to survive without home heating oil because that is an important necessity especially in the winter because everyone likes to stay warm and not be cold.
No, I do not think that the consumer has any control over prices of products with an inelastic demand because they need to pay it no matter what because in most cases it is a necessity to them. For example, consumers can not pick how much they want their rent to be because if that happened everyone would be paying close to nothing. In most cases, consumers do not have control for setting what price they want over products because that just would not be fair. I believe that if they had this power then they would make it very inexpensive. Rent is an inelastic demand because in most cases it is the same price for each month and it is due on a specific date.
Have you ever encountered a problem where you bought a product that has an inelastic demand? Did you buy it? What was your decision factor for it?
Wednesday, April 10, 2013
Monday, April 8, 2013
Other Determinants of Price
As discussed in chapter 19, other factors besides demand and costs can influence price. Some examples of these factors are the stages in the product life cycle, the competition, the product distribution strategy, the promotion strategy, and the perceived quality. All of these factors have the ability to affect price.
The stages in the product life cycle are introductory stage, growth stage, maturity stage, and decline stage. The introductory stage is when management usually sets prices that are high. The reason for this is to hope to recover its development costs quickly. Demand originates in the core of the market and it is somewhat inelastic. Growth stage is when the prices generally begin to stabilize for several reasons. There are three parts to this: competitors have entered the market, increasing the available supply, the product has begun to appeal to a broader market, often lower-income groups, and economies of scale are lowering costs, and the savings can be passed on to the consumer in the form of lower prices. Maturity stage brings further price decreases as competition increases and inefficient, high-cost firms are eliminated. At this stage, price increases are usually cost initiated, not demand initiated. This happens because demand is limited and producers have the same cost structures, the remaining competitors will probably match price reductions. Finally, decline stage is the final stage of the life cycle where you can see further price decrease as few of the remaining competitors try to save the last demands. Prices begin to stabilize when only one firm is left in the market.
In my opinion, I believe that the maturity stage is the most important because distribution channels are a huge cost factor based on the need to offer wide product lines for highly segmented markets, extensive service requirements, and the sheer number of dealers necessary to absorb high-volume production. This is also important due to the fact that demand is limited and producers have similar cost structures along with the remaining competitors will probably match price reductions.
Which stage do you think is the most important, why? Do you think each has its own benefits? What do you believe they are?
The stages in the product life cycle are introductory stage, growth stage, maturity stage, and decline stage. The introductory stage is when management usually sets prices that are high. The reason for this is to hope to recover its development costs quickly. Demand originates in the core of the market and it is somewhat inelastic. Growth stage is when the prices generally begin to stabilize for several reasons. There are three parts to this: competitors have entered the market, increasing the available supply, the product has begun to appeal to a broader market, often lower-income groups, and economies of scale are lowering costs, and the savings can be passed on to the consumer in the form of lower prices. Maturity stage brings further price decreases as competition increases and inefficient, high-cost firms are eliminated. At this stage, price increases are usually cost initiated, not demand initiated. This happens because demand is limited and producers have the same cost structures, the remaining competitors will probably match price reductions. Finally, decline stage is the final stage of the life cycle where you can see further price decrease as few of the remaining competitors try to save the last demands. Prices begin to stabilize when only one firm is left in the market.
In my opinion, I believe that the maturity stage is the most important because distribution channels are a huge cost factor based on the need to offer wide product lines for highly segmented markets, extensive service requirements, and the sheer number of dealers necessary to absorb high-volume production. This is also important due to the fact that demand is limited and producers have similar cost structures along with the remaining competitors will probably match price reductions.
Which stage do you think is the most important, why? Do you think each has its own benefits? What do you believe they are?
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