The role of price in the marketing mix
When pricing a product, a business needs to choose one that fits with the rest of the elements in the marketing mix. E.G. High price so that consumers thinks they are buying high quality goods, low price for low quality goods, or competitive prices in a market with a lot of competition.
Price determination in a free market
People think that prices are determined by the seller of the product, but that is not quite so. Prices are driven by market forces called demand and supply.
Demand is not only that people want to buy a product, but that they want it can are willing to pay for it. Prices can affect how much demand there is for a product. Normally, if the price goes up, demand goes down, and vice versa.
Supply also varies with price. However, it is different. If the price goes up, then the owners would want to be supplied with more products to take advantage of the high price, thus the supply goes up (and vice versa).
For the market price to be determined, demand and supply must all be put onto the same graph. The place where the two lines (called curves) cross is called theequilibrium, where the same number of goods are demanded and in supply resulting in no leftovers. All the products are demanded and all of them are sold.
The graphs above assume that the demand and supply of goods are fixed. But these things can change, which shifts the demand or supply curve to the left or the right in the graph. Changes in the price affects where you are on the curves. But changes in other factors affect the position of the curve on the graph.
- The popularity of substitute products/The popularity ofcomplementary products/Changes inincome/intaste andfashion/ inadvertising.
Elasticity of demand is how easily demand can change when prices change. A product with an elastic demand curve would have a higher change in demandthan a change in price (uses percentages). A product with an inelastic demand curve would have a lower change in demand than a change in price. The elasticity of demand of a product is mainly affected by how many substituteproducts that it has.
Factors affecting supply
The result is: if supply falls, the market price will rise, sales will falland the supply curve will shift to the left. If supply rises, the market price will fall, sales will rise and the supply curve will shift to the right