unit 1 – price mechanism in the economic system · unit 1 –price mechanism in the economic...
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UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
3. Price Setting in an economic system
Setting the prices of goods in a given market depends on
the demand
the supply
the aims of the manufacturers / firms
Specially in countries where price mechanism does not work properly
(all of them).
How firms set the price of goods is up to their objectives such as:
make profit
increase sales
expand the market
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
3.1 Principles of price setting
As you already know:
Quantity of goods and services that consumers want to buy and sellers want
to sell will adjust according to the level of changing in price.
However, the quantity bought and sold move in opposite directions:
When the price of goods and services decreases, buyers will buy more,
but seller or manufacturers will bring less good to the market.
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
This adjustment will cause the quantity bought and sold to be equal
at a specific level of price.
At that price:
Quantity Demanded = Quantity Produced to be Sold
This is called equilibrium.
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
From the table we can conclude that:
at 110 baht/kg (high price) – 220 kg of excessive supply
at 100 baht/kg – All chickens sold
at 90 baht/kg – (low price) –220 kg of excessive demand
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
Moreover, we can conclude that:
equilibrium price = 100 baht
equilibrium quantity = 600 kg
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
3.2 Adjustments and changes in prices of goods and services
Changes in the wants of consumers and suppliers related with the goods
and services in the market, can lead to changes in the equilibrium price
and the equilibrium quantity in 3 different ways:
1) The consumers’ wants change while the wants to produce goods
remain the same: this causes price and quantity of goods to change
in the same direction as the consumers’ want (demand).
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
That is, if the consumers’ wants increase, price and quantity of goods
will increase as follows:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
In some cases, the demand for goods and services decreases. For
instance, during the summer, the wants for sweaters decrease, causing
price and quantity of sweaters to decrease as follows:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
2) The consumers’ wants remain the same while the wants to
produce goods change: in the case that demand remains stable and
the supply is changed, the quantity of goods traded is changed in
the same direction as the supply, but the price is changed in the
opposite direction.
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
For instance, in a year when production of durian increases,
quantity traded increases but the price of durian will decrease:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
In some cases, it is the opposite:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
3) The consumers’ wants and the wants to produce goods change
simultaneously: in reality, demand and supply often change
together simultaneously.
For example, if the climate changes, the production of rice in the
country will decrease. Consumers expect that the price of rice will
increase and try to hoard rice.
When traders notice that supply of rice decreases and people want
to buy more, they try to hoard rice for a profit in the future.
In this case, supply of rice will decrease, but demand for rice will
increase.
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
3.3 Price setting in practice
Price setting has several objectives, such as:
Make profit
To increase sales
To expand the market
To maintain the price level of the goods
To use the price as an indicator
o For instance, setting the price of good quality goods higher than the low
quality ones.
1) Factors that should be considered when setting price: in
addition to considering objectives of business, there are other
factors that need to be considered:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
2) Pricing method in practice: It depends on firms’ strategy, aim,
business competition, and external environment. There are
several method for pricing the products:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
i. Setting price by adding additional profit to the cost of production: It is
a method that firms calculate cost of production per unit called
standard cost. Then, they will set the scale of additional profit that will
be added to the cost of production.
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
ii. Setting price to achieve a targeted reward from investment: It is a
method of price setting to get a reward from the investment as want,
which can be calculated as follows:
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM
iii. Setting different prices: prices of several goods are set differently
depending on characteristics of goods and buyers:
a. To sell the same goods to each customer at different prices, such
as selling to the regular customers cheaper than irregular customers,
or selling to members cheaper than to non-members.
b. To sell to each customer at different price due to different quantity
bought; for example, retail sale is more expensive than wholesale,
such as a bottle of milk costs 10 baht, but a pack of 10 bottles of milk
costs 90 baht.
c. To sell goods to each costumer at different prices; for example, train
tickets for students are cheaper than those for adults.
UNIT 1 – PRICE MECHANISM IN THE ECONOMIC SYSTEM