7. Pricing policies.

Market prices are determined by the interaction of supply and demand. Companies’ pricing decisions depend on one or more of three basic factors: production and distribution costs, the level of demand, and the prices (or probable prices) of current and potential competitors. Companies also consider their total objectives and their consequent profit or sales goals, such as obtaining maximum income, or maximum market share, etc. Pricing strategy must also consider market positioning: quality products generally require “prestige pricing” and will probably not sell if their price is thought to be too low.

Firms with excess production capacity, a large stock, or a falling market share, tend to cut prices. While firms experiencing cost inflation, or in urgent need of cash, tend to raise prices. A company faced with demand that exceeds its possibility to supply is also likely to raise prices.

Demand is said to be elastic if sales respond directly to price variations. When sales remain stable after a change in price, demand is inelastic. Although it is an elementary law of economics that the lower the price, the greater the sales, there are numerous exceptions. For example, price cuts can have unpredictable psychological effects: buyers may believe that the product is faulty or of lower quality, or will soon be replaced, or that the firm is going bankrupt, etc. Similarly, price rises convince some customers that the product must be of high quality, or will soon become very hard to get hold of, etc! A potential customer seeing a price of $499 will register the $400 price range rather than the $500. This is a psychological effect that many sellers count on. Such technique is known as “odd pricing”.

Actually most customers consider elements other than prices when buying something: the “total cost” of a product can include operating and servicing costs, and so on. Since price is only one element of the marketing mix, a company can respond to a competitor’s price cut by modifying other elements: improving its product, service, communications, etc. Reciprocal price cuts nay only lead to a price war, good for customers but disastrous for producers who merely end up losing money.

Whatever pricing strategies a marketing department selects, a products selling price generally represents its total cost (unit per cost plus overheads) plus profit or “risk reward”. Overheads are the various expenses of operating a plant that cannot be charged to any one product, process or department, which have to be added to prime cost or direct cost which covers material and labour. Cost accountants have to decide how to allocate or assign fixed and variable costs to individual products, processes or departments.

Microeconomists argue that in a fully competitive industry, price equals minimum average cost equals break-even point.

8. Economic growth. Costs of economic growth.

It’s essential for people to know how economic growth is encouraged in a market system, about its advantages and disadvantages. It’s also vital to realize the costs that accompany the benefits of economic growth.

If you spent all the money you have now, you might be able to buy many of the things you want. However, you probably would choose not to spend all of your money right now. You realize that by saving some now, you will save more for the future. Societies also must save some of what they produce capital goods as well as consumer goods to meet future economic needs. Long-range economic growth depends on the continued production of capital goods.

Everyone who works contributes to the growth of capital resources. Suppose you earn $72 a week, working evenings in an auto repair shop. How do you contribute to the growth of capital resources? If your manager paid you exactly what the customer paid the company, what would happen to the company? What would happen to the business if no money were saved to replace old tools and equipment? Your labour must be valuable enough to earn more than just the money to cover your wages.

When your manager bills customers for the work you did, the amount will be large enough not only to cover the company’s costs but also to invest in capital resources. Your labour may earn your company $100 a week. Since you are paid $72, you are helping the company to collect $28 a week. Some, or all, of this money can be used for capital resources. When your company uses this money to buy new equipment, it expects future returns from the equipment to justify the purchases. The manager may decide to replace the old tools, hire more help, or expand the shop, for example. The manager makes decisions based on how the company will earn the most profits.

In recent years, many people have argued that economic growth is a mixed blessing. The advantages of growth are fairly clear. As people produce more goods and services, the average standard of living goes up. Growth also keeps people employed and earning income. It provides people with more leisure time, since they can decrease their working hours without decreasing their income. Growth provides the government with additional tax revenues, which enable it to spend more on programs for education, eater and air purification, medical care, highway construction, and national defence.

What are the disadvantages, then? Four of them are: use of natural resources that cannot be replaced; generation of waste products; destruction of natural environments; uneven growth among different groups of society.

In the past, growth has allowed poor people to improve their economic conditions. During periods of growth, people have felt optimistic about their future. Nevertheless, continuing economic growth at the pace of today may permanently damage our world, polluting air, land and waters, and using up natural resources. In considering the benefits and problems of growth, it is necessary to recall that to survive, every economy needs people, capital and natural resources, that depend on one another. If these resources are overused to promote economic growth now, future growth may be much slower. Growth, however, sometimes provides solution to the problems.

Long-range economic growth causes more than just air and water pollution. Growth leads to the destruction of forests, wetlands, beaches, mountains, ocean beds. When the society tries to control destruction it takes money to cover the costs.

Thus the rate of growth may not be so fast as it would if we did not have to worry about the destruction. For example, strip mining, a cheap way of getting coal out of the ground, involves stripping away the surface of land. But the benefit of this method is lessened because, leaving ugly, barren hills, strip owners are required to restore the land, the cost of doing so turns up the price of coal. When coal is more expensive, industries that use it may cut back production or bill their customers at a higher rate in order to justify the purchase of coal. Either action can slow down economic growth.

Decisions about economic growth are not easy to make. In the past, growth has allowed poor people to raise the average standard of living.

To grow, an economy needs capital goods because they are used to produce other goods and services. Each company must reserve money to replace equipment and update its factories, as well as to expand in order to meet the demand. Thus everyone in some way pays the hidden costs of economic growth.