The market: demand, suppIy and prices

The market is the environment in which exchange takes place, where buying and selling goods
and services occur. t is not necessary a physical location. The interaction of the forces of demand
and supply creates a market. The demand is how much of a good or a service do consumers want
to buy at each conceivable price. Law of demand: as prices increase, quantity demanded
decreases and vice versa ceteris paribus, for normal goods. t can generate a downward sIoping
demand curve, reflecting the negative relationship between prices and quantities. Price is the
primary determinant of demand and causes a movement in the demand curve. Secondary
determinants are: income, tastes and fashion, prices of reIated goods (substitute and
compIimentary).
Exceptions to the Law of Demand
Bandwagon goods are goods which everybody wants to have despite price. Bandwagon goods
are status symbol products. Inferior goods are goods which consumers buy because they need it
regardless bad quality. Giffen goods were discovered by Sir Giffen in London. f price of bread
fell, poor people do not buy more bread, but the buy gin. The same would be if income increases.
Price is the main determinant for suppIy. Supply can be figured as an upward positive sloping
curve. Law of SuppIy: as price increases, quantity supplied increases and vice versa, ceteris
paribus. Secondary determinant of supply are: demand, weather, technoIogy, depIetion and
discovery.
Curves of demand and supply intersect at the EquiIibrium point, which represent the price of
market balance. f price is lower than the equilibrium balance there is an excess in demand and if
price is higher there is an excess in supply. EquiIibrium: the unique price at which quantities
demanded equal quantities supplied. Market naturally moves toward equilibrium. Price is always
moving to the equilibrium automatically.
Price controI and price stabiIization: sometimes the marketplace finds that the price might be:
too high to consume, too low for producers to survive or too much fluctuation. n all of these cases
government and other agencies may interview with one or all of three cases: Price ceiIings:
sometimes customers may find it too expensive to afford certain types of goods. n such cases the
government may impose a price ceiling so that price can't go higher than a prefixed level. Price
fIoors: sometimes price is too low for producers to make a living, so the government may impose a
price below prices are not allowed to go. Price stabiIization strategies: governments and
agencies buy excess products, in case of plenty-full; in order to prevent a price collapse.
AppIication Demand Theory
EIasticity: As price goes up demand goes down and vice versa but we never buy too much. As
income goes up demand goes up (generally) but we never say how much. As a price of a
substitute good goes up the demand of the good in question goes up. As a price of a
complementary good goes up the demand of a particular good goes down. But how does quantity
demanded react?
Price eIasticity of demand: PED measures by how much, does the quantity demanded changes
as result of given change in price.
%change in Qd / %change in P= PED
f PED is between - and -1 the good is eIastic or sensitive. f it is between -1 and 0 the good is
ineIastic or insensitive. PED can be very useful to take a decision about price making. For
example if a good is elastic it is convenient to low the price, so demand will goes up very quickly.
But why goods are elastic or inelastic? Addiction: Addictive goods are goods you can't stop
buying regardless the price. DurabiIity of good: a good that lasts long time will be more sensitive
to price change. That's why consumers will try to deal with the cheapest provider for these types of
goods. VaIue of the consumer search time: a consumer who has a low time value will spend
more time on searching for the best price in the market. AvaiIabiIity of cIose substitutes: a good
with more substitutes will be more sensitive to price changes because if a substitute is expensive
consumers will switch to the alternative good.
Income eIasticity of demand: %change in Qd / %change in Y = YED. YED measures by how
much demand changes in relation to a change in income. f the result is negative the good is
inferior, if between 0 and 2 it is normaI and if greater than 2 it is Iuxury.
Cross-price eIasticity %change in Qd of goodA / %change in P of goodB = sab. sab measures by
how much demand of a good changes in relation to the price of a related good. f the result is
negative it means that the good b is a complimentary good, otherwise it is a substitute good.

Pricing strategies

For any business pricing is a very powerful weapon because if we know how to price appropriately
we can achieve such things as: sell more products than our competitors, launch a new product
very quickly and very successfully into the market, change perceived quality, start a price war,
etc. Pricing is a dangerous weapon. f involved in a price war we may be forced out of business
because of prices not high enough to cover all costs.
Penetration pricing: Low price, high volume. t is a very low price and it sells lots of units in a new
market. Suitable for products with long anticipated life cycles.
Market skimming: it is a real high price when the product is introduced in order to pay for
development costs apply to electronics or new drugs. Suitable for products that have short life
cycles or will face competition at same point in the future.
VaIue pricing: based on consumers perception of value. This occurs when costumers have a
perception of great value. For example Rolex, Ferrero and designer brand clothes.
Loss Ieader pricing is deliberately selling products below cost price in order to tempt the
costumers to come and do business and perhaps buying something else. t is usually applied to
inferior products.
PsychoIogicaI pricing could be described as a trick price. t gives to costumers the impression of
paying less than actual price. For example 9.99C instead of 10C.
Going rate (Leadership pricing): this is often called lazy man pricing because it involves charging
the same price as everybody else or following the price of the leadership in a specific market. t
can prevent a price war and it can be an indication of inelastic demand so there will be little
response to price competition.
Tender pricing can work for both buyers and sellers to submit the best price.
Price discrimination: this means that we can charge different prices to different classes of
costumers for exactly the good. The reason behind this practice is to maximize revenue and profit
from each consumer. With price discrimination we can extract consumer's surplus from each
consumer. n fact there are consumers who are willing to pay more for the same product. Condition
necessary for discrimination pricing to work: monopoly power so that consumers can't shop
around, there must be a separation of market either in time or in space, there must be no room for
arbitrage (buy in a market and sell in another), market have to be impenetrable.
Destroyer pricing: the name suggests that is designed to get rid of weaker competitors. t works
for short term periods and strong firms. Deliberately selling at very low price.
Absorption pricing: involves in setting a price for a product that may not cover its full cost of
production with a multiproduct offer, the sales of this product may make a contribution to covering
our fixed costs better.
MarginaI cost pricing: it involves charging price higher than marginal costs and there will be
different costs for different levels of production.
Contribution pricing: involve setting a price that may not cover all our costs. We may be happy or
satisfied but our variable costs are covered and some contribution may be made to cover costs.
The logic behind contribution pricing is that: fixed costs are going to occur anyway and what is
relevant is what production adds to a variable cost.
Target pricing: involves setting prices to reach a certain prefixed percentage of profit.
Cost-pIus pricing: Simple form of pricing called mark-up pricing and it involves adding a certain
percentage on the price.

InfIuence of eIasticity
n general terms refers to the sensitivity of quantity demanded to any of the determinants of
demand: price, income and price of related goods. This is why we have different types of elasticity.
n any pricing decision it is important for us to know and be conscious of two types of elasticity:
price elasticity and cross-price elasticity. Price elasticity is useful because it gives an indication of
how quantity demand will react. With regard to cross-price elasticity it is useful for us to know if
changing the price will cause an increased demand or decreased demand for a related good.

Advanced pricing strategies
We need to set price when we have a new product, or when we enter a new market with an
existing product. Need to decide what position you want your product to be in.
Price quaIity strategies: in Kotler's model he trades off price point with different classes of quality.
This generates 9 possible price quality relationship.
High price Medium price Low price
High quality Premium High value Super value
Medium quality Overcharing Mid value Good value
Low quality Rip-off False economy Economy

Pricing process examines the steps we must take before pricing a product regardless of whether
the product is a new product or an existing product launched in a new market.
1. Set pricing objectives
2. Analyze demand
3. Draw conclusion from competitive intelligence
4. Select pricing strategies appropriate to the political social legal and economical
environment
5. Determine specific price
Possible pricing objectives: When setting price we will set them for different reasons. The price
operating in the market often reflect certain objectives: target profit return, volume objectives, other
objectives e.g. matching competitors prices.
Demand anaIysis
t includes running a simulation to test the following variable in the market:
1. What will be various quantity demanded at different price points?
2. How will quantity demanded changes as price changes?
3. Are there different elasticity in the different market segments?
4. Do different market segments have different needs? f so are they willing to pay a premium
for their extra needs?
CaIcuIation of profits, EthicaI considerations on pricing and information needed for price
changes.
New product pricing strategies: skimming pricing, penetration pricing and intermediate
pricing.
Price fIexibiIity strategies:
O One-price policy-setting one fixed price for all markets
O Flexible price policy-setting different prices in different markets based on: geographic
location, time of delivery, the complexity of the product
Product Iine pricing: when an organizations has a productive line of more than one product, it
should maximize profit for the entire organization and not each single product.
Leasing strategy: Often leasing is more convenient than purchasing.
Reaction to price change
Customers and competitors may react to price change. f the product has a high price or it is
bought frequently buyers is bound to notice the change. Competitors on the other hand may see
each price change as a challenge.
HeaIthcare market
Healthcare market is the market for healthcare intervention that ranges from the market for
operations to preventative medicine products and everything between. n economic theory when
you speak of markets or goods we almost always exclusively examine them in perfectly
competitive market. The market for healthcare is different and perfect competition could not be
applied to it. This is because it is a derived demand. t means that we do not demand healthcare
interventions just for utility or enjoyment. But rather we demand them for the downstream benefits
they bring for example good health and longevity. Healthcare is not the only derived demand, other
example includes demand for roads or education. Demand cannot be forecast with any great
degree of accuracy. The demand for conventional goods like pasta does not change significantly
from year to year. t is a reasonable therefore to asset that it is possible to forecast future demand
levels for conventional products. t is not possible to do this with most healthcare interventions.
Number of pIayers on the suppIy side of the market. With conventional goods there are many
buyers and many sellers we are in a state of perfect completion. However with healthcare market
there are many buyers and very few sellers, in fact entry is so restricted in many medical
specialties that there are often only one or two practicians. The implication of this is that restricted
supply is a tool to monopolization. Independence versus interdependence of demand and
suppIy. With conventional goods demand and supply are almost totally independent. You cannot
influence the choice of a costumer directly with products supplied. While in healthcare market a
doctor can influence patients about what and how much they consume. This is called Physician
nduced Demand (PD) and it may be caused by patient ignorance or an inelastic demand for
healthcare interventions. Profit motive. For conventional goods and services the only reason to be
in a market place is to provide max profit. Healthcare is different because some interventions may
be free of charge for the patient and be paid by the government for example vaccination programs.
n addition medical practicians are duty bound to provide emergency care if the opportunity
presents itself. Homogeneity of output. n the marketplace for conventional goods and services
the product is almost always homogeneous. However every healthcare solution is unique to the
patient in fact healthcare solutions are often tailor made to the exact requirement of the patient. n
this case we could argue that healthcare output is heterogeneous. Consumers information. n
perfect competition we assume perfect knowledge. This is not the case in the market for healthcare
because in healthcare there has to be asymmetry of information between providers and consumers
because individual consumers (patient) knows very little about the actual product that he or she is
about to consume. EIasticity of demand. t means how does the quantity demanded react to
changes in price. With conventional goods there is always some degrees of elasticity. With
healthcare interventions the demand is inelastic. LiabiIity of consumers for costs. WlLh Lhe
convenLlonal markeLplace consumers pay 100 of Lhe prlce of Lhe producL whlle ln healLhcare markeL
Lhere could be some economlcal help from governmenL or Lhlrd parLles llke lnsurance or companles
1he econom|cs of the env|ronment
Slnce Lhe Llme of lndusLrlal revoluLlon economlc growLh employmenL and ouLpuL has lncreased ln Lhe
lndusLrlallzed world Lver slnce Lhe lnvenLlon of Lhe sLeam englne economlcs developmenL has occurred aL
a greaL cosL Lo Lhe naLural envlronmenL 1he maln polluLers are
O lrLy lndusLrles
O vlaLlon
O 1he prlvaLe moLorcar
LnvlronmenLal degradaLlon occurs because negaLlve exLernallLles are noL prlced lnLo Lhe producLlon
process negaLlve exLernallLles are downsLream cosLs on socleLy and envlronmenL caused by producLlon
processes CovernmenLs worldwlde Lry Lo avold ellmlnaLe or reduce negaLlve exLernallLles by maklng Lhe
polluLers pay lmposlng Laxes and fees on producLlon WlLh kyoLo agreemenL Lhe counLrles who have slgned
up have max carbon quoLes LhaL Lhey can produce and lf Lhey go over LhaL llmlL Lhey are flned heavlly
CounLrles LhaL have produced less Lhan Lhe llmlL can sell Lo counLrles over Lhe llmlL carbon credlLs
LnvlronmenLal and naLural resources are an lnpuL ln producLlon lL ls a scarce resource and lmposes a llmlL
ln growLh
oto protoco|
lor decades lL has been acknowledged LhaL Lhe maln conLrlbuLors Lo Lhe global warmlng have been CPC
SomeLhlng had Lo be done and ln Lhe unlLed naLlons congress 37 lndusLrlallzed counLrles slgned up Lo
reduce CPC emlsslons 1here are Lhree mechanlsm Lo reduce emlsslons [olnL lmplemenLaLlon emlsslon
Lradlng and clean developmenL mechanlsm !olnL lmplemenLaLlon lnvolves ln acLlon underLaken by Lwo
parLlclpaLlng counLrles Lo dellberaLely reduce emlsslons Lmlsslon Lradlng ls buylng and selllng carbon credlL
beLween parLlclpaLlng counLrles Clean developmenL mechanlsms are acLlons acL Lo reduce emlsslons by
developmenL parLles
ost benef|t ana|s|s
ldeally a caplLal pro[ecL should produce more beneflLs Lhan cosLs 1he cosLs lnvolved would come abouL
from Lhe lnlLlal lnvesLmenL and Lhe runnlng cosLs of Lhe pro[ecL lL could be nlce Lo know lf Lhe moneLary
beneflLs of a new pro[ecL were greaLer Lhan Lhe moneLary cosLs even before we sLarL Lhe pro[ecL C8
allows us Lo do Lhls 1he maln dlfflculLy ls Lo compare cosLs LhaL have occurred ln Lhe pasL wlLh beneflLs LhaL
occurs ln Lhe presenL or ln Lhe fuLure 1o do LhaL we use Lhe dlscounL raLe 1he operaLlon of comparlng
cosLs and beneflLs ls called dlscounLlng cash flow
Deve|opment econom|cs
1radlLlonally ln developmenL economlcs Lhe whole economlcs was dlvlded ln 3 classes 1
sL
world 2
nd
and
3
rd
We now have Lhe developed world and Lhe developlng counLrles Maln dlfferences are lncome healLh
llfe expecLancy lnfanL morLallLy and llLeracy 1he reasons for underdevelopmenL are populaLlon lssues
scarclLy of resources lncludlng clear waLer lack of caplLal poor lnfrasLrucLures opulaLlon lssues may be
large LradlLlonal famllles lack of conLracepLlon meLhods or Lhe pracLlce of polygamy lnfrasLrucLures are
lmporLanL for developmenL because beLLer communlcaLlon can reduce Lhe cosL of shlpplng and movlng
goods Puman caplLal ls an lmporLanL lnpuL and lL lncludes educaLlon and healLh condlLlons ln developlng
counLrles workers are noL speclallzed because of Lhelr scarce educaLlon so Lhe producLlon ls less ln
quanLlLy and worse ln quallLy lurLher more Lhe lack of Lechnology and Lechnlcal equlpmenL reduces much
Lhe producLlon ln parLlcular way ln agrlculLure llnally developlng counLrles may be explolLed by
mulLlnaLlonal flrms wlLh poverLy and scarclLy of resources as consequences
UN M|||enn|um Deve|opment Goa|s
8y Lhe Lerm of Lhe mlllennlum a new lnlLlaLlve come lnLo belng ln order Lo Lry Lo lmprove Lhe economlcs
and Lhe developmenL slLuaLlon ln poor counLrles 1he lnlLlaLlve was Lhe un response Lo underdevelopmenL
ln Lhe form of MC 1hese were a number of developmenL ob[ecLlves for poor counLrles Lo be achleved by
2013 lL was slgned up by 189 naLlons 1here are measurable goals and ln mosL cases would relaLed Lo Lhlng
llke healLh educaLlon wellbelng eLc
1 LradlcaLe exLreme poverLy and hunger reduce by half Lhe people llvlng on less Lhan a dollar a day
achleve employmenL and decenL work for all reduce by half Lhe people who suffer from hunger
2 chleve unlversal prlmary educaLlon ensure LhaL all boys and glrls compeLe prlmary school
3 romoLe gender equallLy and empower women ellmlnaLe gender dlsparlLy ln prlmary and
secondary educaLlons
4 8educe chlld morLallLy reduce by 2/3 morLallLy raLe among chlldren under 3 from 1990
percenLage
3 lmprove maLernal healLh reduce by maLernal morLallLy raLlo achleve unlversal access Lo
reproducLlve healLh
6 CombaL Plv/lS Malarla and oLher dlseases half and begln Lo reserve Lhe spread of Plv achleve
by 2010 unlversal access Lo LreaLmenL for Plv for all who need lL half and begln Lo reserve Lhe
lncldence of malarla and oLher ma[or dlseases
7 Lnsure envlronmenLal susLalnablllLy reserve loss of envlronmenLal resources reserve blodlverslLy
loss reduce by Z people wlLhouL access Lo safe drlnklng waLer and baslc sanlLaLlon
8 Clobal parLnershlps for developmenL

a|r trade
1he l1C ls abouL 30 years old and was developed ln response Lo explolLaLlon of producers of mosL prlmary
producLs by large mulLlnaLlonal ln developlng world lalr Lrade alm ls Lo provlde falr wages Lo workers so
LhaL Lhey can feed educaLe and medlcal provlde for Lhemselves and Lhelr famlly l1C cuLs ouL Lhe mlddle
man meanlng more proflL goes Lo Lhe farmer
1he econom|cs of educat|on
Puman caplLal conLrlbuLes Lo Lhe producL of capaclLy of Lhe economlc along a physlcal caplLal (labour
machlnery land) ln essence human caplLal would be descrlbed as Lhe poLenLlals of lndlvldual Lo conLrlbuLe
Lo economlc developmenL lL makes sense Lherefore LhaL lf we lmprove human wellbelng by means of
healLhcare and educaLlon we wlll lmprove human caplLal educaLlon Puman caplLal ls a maln lnpuL for
producLlon Puman caplLal can be lmproved wlLh lnvesLmenLs ln educaLlon Lralnlng and healLhcare
lndlvldual wlLh more human caplLal recelve hlgher pay WlLh hlgher educaLlon people can expecL hlgher
paymenLs more pleasanL [obs lower unemploymenL raLe and more psychologlcal beneflLs