TEST YOURSELF

Chapter 13: Understanding Pricing

Essay Questions

1. The text states that “prices are a mechanism that allows the customer to make a decision.” Explain this statement in your own words.

2. “Demand” refers to the amount of a firm’s products or services that consumers will purchase at different prices during a specific period. In a pure competition market structure, it is usually assumed that consumer demand will rise as prices fall and decrease as prices rise. What will happen to consumer demand as prices rise and fall in the monopolistic competition, oligopoly, and monopoly market structures?

3. “Supply” refers to the amounts of a product or service that companies will offer for sale at different prices during a specified time period. In a pure competition market structure, it is usually assumed that companies will offer more product for sale as prices rise (in order to maximize their profitability) and that they will offer less product for sale as prices fall (in order to minimize their losses). What will happen to supply as prices rise and fall in the monopolistic competition, oligopoly, and monopoly market structures?

4. There are several general determinants of demand elasticity: (1) the availability of substitutes, (2) the availability of more important complements, (3) whether a product or service is a necessity or a luxury, (4) the portion of a person’s budget that is spent on a product or a service, and (5) the time perspective under consideration, with demand often less elastic in the short run than in the long run. Thinking about a recent purchase you made, which of these determinants influenced your purchase decision?

5. Retailers often use the cost-plus approach to setting prices for the various products they offer for sale. Specifically, they use markups to set their regular shelf prices and markdowns to set their short-term feature prices. Why do retailers generally use the cost-plus approach rather than economic approaches focusing on supply and demand?

6. Costs are an important consideration in setting prices, but not the only consideration. Several other factors that should be taken into account are mentioned throughout this chapter. Review the chapter and list at least five other factors in addition to cost that are often taken into consideration in setting prices or that influence price setting.
   
   

Back to Test Yourself