Question

1. (a) Using the concept of price elasticity of demand explain why companies set different prices for the same product in different markets.

(b) Apart from price elasticity of demand examine the other factors which influence a company when setting a price.

Answer 1

Answer to Question 1 A)

Price elasticity of demand is the degree of responsiveness which people have to the changes in price of the good. The formula for the same is Change In quantity Demanded/Change in Price of the good.

The reason as to why some companies, price different products differently in some markets is that some markets tend to be extremely price sensitive while others are relatively lesser price sensitive. This means that an equal shift in price, would cause a major decline or increase in demand in some markets, while in others this shift would not be as much.

We have examples of companies such as Pepsi, Coca Cola etc which have to price their goods reasonably in countries such as India, Bangladesh etc while they can earn premiums on the developed counterparts such as United States, United Kingdom and other similar nations. This is because the price sensitivity in low income countries is relatively high and the changes in price directly impact purchasing capacity for people in these countries whereas in high income countries, the goods and services can change their prices without significant impact on quantity demanded.

Answer to Question 1 B)

In addition to elasticity the following are the factors which influence a company when setting a price.

1) Cost of Raw Materials as it impacts the profits directly. When a company can procure raw materials cheaply, its total profit goes up.

2) Government Regulation such as taxes also play a vital role in deciding prices. In countries where government regulations are high, the same is reflected in the prices.

3) Consumers Buying Capacity is another determinant as explained high income consumers have higher demand pattern than low income countries

4) The level of competition also determines the price. The higher the competition in the market, the lower are the profit margins and the relative pricing of a good.

5) Future expectations also have a bearing on the price. If a company expects that in the future the raw materials will be costlier, they hike the price today so as to cover losses if any.

6) Technological advancements also effect prices. If a company is high on technology it can produce more and charge lesser.

7) Volume of sales also determine the pricing. If the sales volume is high, suppliers can reduce prices and increase availability to make more profits.

8) The nature of the product also decides the price. If the product is a necessity, then the prices can be charged higher as the demand for these goods remain high. Some examples are critical health care.

Please feel free to ask your doubts in the comments section.