Trigger 5

Problem: how to make supply meet the demand?

Learning objectives:

1. a) What factors affect pricing in market?

b) How does the pricing affect the demand?

2. How to deal with surplus and deficit of national resources?

3. How does oil influence the global economy?

1.(a) The pricing decisions for a product are affected by internal and external factors. (

A. Internal Factors:

1. Cost:

While fixing the prices of a product, the firm should consider the cost involved in producing the product. This cost includes both the variable and fixed costs. Thus, while fixing the prices, the firm must be able to recover both the variable and fixed costs.

2. The predetermined objectives:

While fixing the prices of the product, the marketer should con­sider the objectives of the firm. For instance, if the objective of a firm is to increase return on investment, then it may charge a higher price, and if the objective is to capture a large market share, then it may charge a lower price.

3. Image of the firm:

The price of the product may also be determined on the basis of the image of the firm in the market. For instance, HUL and Procter & Gamble can demand a higher price for their brands, as they enjoy goodwill in the market.

4. Product life cycle:

The stage at which the product is in its product life cycle also affects its price. For instance, during the introductory stage the firm may charge lower price to attract the custom­ers, and during the growth stage, a firm may increase the price.

5. Credit period offered:

The pricing of the product is also affected by the credit period offered by the company. Longer the credit period, higher may be the price, and shorter the credit period, lower may be the price of the product.

6. Promotional activity:

The promotional activity undertaken by the firm also determines the price. If the firm incurs heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in order to recover the cost.

B. External Factors:

1. Competition:

While fixing the price of the product, the firm needs to study the degree of competi­tion in the market. If there is high competition, the prices may be kept low to effectively face the competition, and if competition is low, the prices may be kept high.

2. Consumers:

The marketer should consider various consumer factors while fixing the prices. The consumer factors that must be considered includes the price sensitivity of the buyer, purchasing power, and so on.

3. Government control:

Government rules and regulation must be considered while fixing the prices. In certain products, government may announce administered prices, and therefore the mar­keter has to consider such regulation while fixing the prices.

4. Economic conditions:

The marketer may also have to consider the economic condition prevail­ing in the market while fixing the prices. At the time of recession, the consumer may have less money to spend, so the marketer may reduce the prices in order to influence the buying decision of the consumers.

5. Channel intermediaries:

The marketer must consider a number of channel intermediaries and their expectations. The longer the chain of intermediaries, the higher would be the prices of the goods.

(b) How does the pricing affect the demand?

Cost does not necessarily mean a dollar amount. Cost simply represents what is given up to acquire something, even if it is time or energy. True cost also implies opportunity costs. Consumers only enter into a voluntary trade if they believe, or ex-ante, they receive more value in return; otherwise, no trade occurs. When the relative cost of a good increases, the gap between value and cost shrinks. Eventually it goes away. Thus, the law of demand really states: as a good’s true cost increases, consumers demand relatively less of it.

2. How to deal with surplus and deficit of national resources?

Global oil markets will swing from surplus to deficit in the first half of 2017 as OPEC and other producers follow through on an agreement to cut supply, according to the International Energy Agency.

Oil stockpiles will decline by about 600,000 barrels a day in the next six months as curbs by OPEC and its partners take effect, said the agency, which had previously assumed inventories wouldn’t drop until the end of 2017. Russia, the biggest producer outside OPEC to join the deal, will gradually implement the full reduction it promised, according to the IEA.

Why? Politics were the driving factor behind the deal

The driving force behind the deal last week was politics, though. Saudi Arabia and OPEC both needed to show that they still have relevance in world markets. (

3. How does oil influence the global economy?

As Linsey Congdon, economic research analyst at Alliance Trust, points out, the oil price and economic strength are linked. “The best example of this was during the financial crisis, when global demand dropped sharply, causing a very steep decline in the oil price,” she explains.

“The IMF estimates that a $10 per barrel fall in oil prices is associated with around a 0.2pc boost in global GDP,” she adds. “When global economic growth is strong, higher levels of demand push the oil price higher.”

As the oil price fluctuates, different types of national economy are affected in different ways. Oil-consuming countries will benefit the most from low oil prices, whereas oil-producing nations will be negatively impacted.

“When oil prices fall, there is a large redistribution of wealth from producers, who will receive less for production, to consumers, who will benefit greatly from lower energy and transport prices. This cash windfall acts like a tax cut, leaving them with more money to spend on other things,” Ms Congdon says.

Like what you read? Give Uliana Belonogova a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.