Question

Describe the role of prices in marketing economics?

Answer 1

Firstly I would like to discuss about the how price plays an important role in marketing Economy.

Price is important to marketers because it represents marketers' assessment of the value customers see in the product or service and are willing to pay for a product or service.

In simple words we can say,

In Market economy The price of goods plays a crucial role in determining an efficient distribution of resources . Price acts as a signal for shortages and surpluses which help firms respond to changing market conditions.

The price of goods plays a crucial role in determining an efficient distribution of resources in a market system.

Now I am explaining Role of Price

• Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions.   
• If a good is in shortage – price will tend to rise. Rising prices discourage demand, and encourage firms to try and increase supply.   
• If a good is in surplus – price will tend to fall. Falling price encourage people to buy, and cause firms to try and cut back on supply.
• Prices help to redistribute resources from goods with little demand to goods and services which people value more.   
• Adam Smith talked about ‘the invisible hand‘ of the market. This ‘invisible hand’ relies on the fluctuation of prices to shift resources to where it is needed.

• Example of how price influences a market

  1. Fall in supply causes higher price

• 

• As the supply of oil falls, the price rises.
• In the short-term, demand is price inelastic and so there is only a small fall in demand.   

  Impact in long-term

  However, markets do not stay static. If price rises, the profitability of producing oil increases. Firms can now make super-normal profit because the marginal revenue is greater than marginal cost.

  Therefore, this higher price acts as an incentive for firms to try and increase supply. For example, at a low price, it was not worth drilling for oil in the North Sea, but with the higher price, it is an incentive.

• Therefore, in the long-term, the higher price causes more investment in the industry and supply can increase back to S LR
• In this way the price plays an important role in marketing Economy. I hope this will help you ?