MB0042 – Managerial Economics - 4 Credits
(Book ID: B1131)
Assignment Set- 2
Ques1. Define Pricing Policy. Explain the various objective of pricing policy.
Ans. Pricing Policies
A detailed study of the market structure gives us information about the way in which prices are determined under different market conditions. However, in reality, a firm adopts different policies and methods to fix the price of its products. Pricing policy refers to the policy of setting the price of the product or products and services by the management after taking into account of various internal and external factors, forces and its own business objectives. Pricing Policy basically depends on price theory that is the corner stone of economic theory. Pricing is considered as one of the basic and central problems of economic theory in a modern economy. Fixing prices are the most important aspect of managerial decision making because market price charged by the company affects the present and future production plans, pattern of distribution, nature of marketing etc. Generally speaking, in economic theory, we take into account of only two parties, i.e., buyers and sellers while fixing the prices. However, in practice many parties are associated with pricing of a product. They are rival competitors, potential rivals, middlemen, wholesalers, retailers, commission agents and above all the Govt. Hence, we should give due consideration to the influence exerted by these parties in the process of price determination.
Broadly speaking, the various factors and forces that affect the price are divided into two categories. They are as follows:
I External Factors (Outside factors)
1. Demand, supply and their determinants.
2. Elasticity of demand and supply.
3. Degree of competition in the market.
4. Size of the market.
5. Good will, name, fame and reputation of a firm in the market. 6. Trends in the market.
7. Purchasing power of the buyers.
8. Bargaining power of customers
9. Buyers behavior in respect of particular product
II. Internal Factors (Inside Factors)
1. Objectives of the firm.
2. Production Costs.
3. Quality of the product and its characteristics.
4. Scale of production.
5. Efficient management of resources.
6. Policy towards percentage of profits and dividend distribution. 7. Advertising and sales promotion policies.
8. Wage policy and sales turn over policy etc.
9. The stages of the product on the product life cycle.
10. Use pattern of the product.
Objectives of the Price Policy:
A firm has multiple objectives today. In spite of several objectives, the ultimate aim of every business concern is to maximize its profits. This is possible when the returns exceed costs. In this context, setting an ideal price for a product assumes greater importance. Pricing objectives has to be established by top management to ensure not only that the company’s profitability is adequate but also that pricing is complementary to the total strategy of the organization. While formulating the pricing policy, a firm has to consider various economic, social, political and other factors. The Following objectives are to be considered while fixing the prices of the product.
1. Profit maximization in the short term
The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achieve this objective should be formulated in such a way as to maximize the sales revenue and profit. Maximum profit refers to the highest possible of profit. In the short run, a firm not only should be able to recover its total costs, but also should get excess revenue over costs. This will build the morale of the firm and instill the spirit of confidence in its operations. 2. Profit optimization in the long run
The traditional profit maximization hypothesis may not prove beneficial in the long run. With...