FIN FPX 5710 Assessment 4 Pricing Analysis FIN-FPX5710 Economic Foundations for Financial Decision Making
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Introduction
This report aims to advise our client as they prepare to launch a new ultra-light notebook computer. The analysis will examine how market conditions may influence their pricing and marketing decisions, focusing on the effects of supply, demand, equilibrium, and elasticity on both individual firms and market dynamics. I will apply producer theory principles regarding pricing, assess how competition impacts markets, and explore how economic conditions shape organizational decisions on buying, selling, pricing, and supplying goods. Additionally, I will examine how regulations may influence their business strategy.
Demand, Supply, and Equilibrium
Most of the world’s economies use a market system, also referred to as capitalism or a mixed economy. In this system, individuals and businesses work towards achieving their economic goals by making decisions regarding work, consumption, or production. This system operates through private ownership of capital and uses prices to communicate and coordinate economic activity through markets (McConnell, 2021, p. 27). A market brings together sellers (suppliers) and buyers (demanders). The model of supply and demand is considered one of the most significant contributions of economics, explaining how markets operate, which are essential for the goods and services we rely on (McConnell, 2021, p. 46). Demand refers to a schedule that displays the quantities of a product consumers are willing and able to purchase at various prices over a specific time frame (McConnell, 2021, p. 47).
For meaningful analysis, the quantity of a good being demanded must be measured within a certain time frame and under the assumption that if the price of one item in an industry rises, all similar products will follow. The law of demand shows an inverse relationship between price and quantity demanded. Three factors explain this inverse relationship. First, the law of demand aligns with common sense, as price acts as an obstacle for consumers. Higher prices generally lead to reduced purchases, while lower prices lead to increased consumption. Second, each buyer derives less satisfaction or utility from each additional unit of a product, so they will only purchase more if the price decreases. Lastly, the income and substitution effects provide further explanation.
The income effect shows that a lower price increases a buyer’s purchasing power, allowing them to buy more, while the substitution effect encourages consumers to choose the cheaper of two similar products (McConnell, 2021, p. 48). Five key determinants of demand are: (1) consumer preferences, (2) the number of buyers, (3) consumer incomes, (4) prices of related goods, and (5) consumer expectations (McConnell, 2021, p. 50). Any changes in these determinants can cause a shift in overall demand at the market level, impacting individual firms. For instance, if demand for pickles decreases, the market may not sustain all producers, forcing some out of business while the market itself shrinks.
FIN FPX 5710 Assessment 4 Pricing Analysis
Supply refers to a schedule that shows the quantities of a product producers are willing and able to sell at different prices over a specific period (McConnell, 2021, p. 52). The law of supply indicates a positive relationship between price and quantity supplied. Higher prices encourage firms to produce and sell more, while lower prices have the opposite effect (McConnell, 2021, p. 53). Whereas price is a hurdle for consumers, it represents revenue for producers, motivating them to increase production at higher prices. The six main determinants of supply include: (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers (McConnell, 2021, p. 52). A change in any of these determinants can lead to an increase or decrease in supply. For example, a rise in resource prices increases production costs, reducing profit margins and ultimately lowering the supply of a product.
Equilibrium price is the price where the intentions of buyers and sellers align, meaning the quantity demanded equals the quantity supplied. At this point, there is no surplus or shortage because market forces have driven the price to equilibrium, which remains stable until affected by changes in supply or demand determinants (McConnell, 2021, p. 56). Adam Smith described this phenomenon as the “invisible hand” guiding economic interactions toward socially beneficial outcomes. Economists now term this an “emergent property,” where the behavior of the entire system is more than the sum of its individual parts (McConnell, 2021, p. 57). For example, if 100 spatulas are priced $1 above equilibrium, there will be a surplus, pushing prices down as producers lower prices to clear exces