ricing is the process of determining what a company will receive in exchange for its product or service. www.unitedworld.edu.in

1. PRICING
How microeconomics affect it.

2. Introduction
 Microeconomics is a field of economic study that focuses
on how an individual's behaviour and decisions affect the
supply and demand for goods and services.
 Price is derived by the interaction of supply and demand.
 A demand curve gives the relationship between the
quantity of a good that consumers are willing to buy and
the price of the goods.
 A supply curve gives the relationship between the
quantity of a good that producers are willing to sell and
the price of the good.

3. Equilibrium Price
Price is derived by the
interaction of supply and
demand.The resultant
market price is dependent
upon both of these
fundamental components of
a market. An exchange of
goods or services will occur
whenever buyers and sellers
can agree on a price. When
an exchange occurs, the
agreed upon price is called
the "equilibrium price", or a
"market clearing price.
Now, we put the demand
and supply curves together
to understand the market
mechanism.The two curves
intersect at the equilibrium
price and quantity where the
quantity supplied is equal to
the quantity demanded.

4. Effect of decrease in supply
When supply of the commodity
falls in the market due to any
particular reason, demand
remaining constant, its price rises
as the commodity would not be
easily available in the market.
There is an inward shift in supply.
Suppose , the demand and
supply of cadbury rasgolla is
equal at the point where D1 and
S1 meet, with quantity
demanded of the sweet is on the
x -axis and the price of the sweet
on the y-axis. If the price of milk
falls, milk being the main
component of rasgolla, the sweet
maker would increase the supply
of the sweets. Hence, supply
curve shifts to the right of S1 and
equlibrium price falls from
original price P1 to P3.
This is an outward shift in supply.

5. Effect of increasing demand
Suppose there is an increase
in income.This would lead to
higher purchasing power for
a consumers, demand for a
commodity goes up, hence ,
demand curve shifts to the
right ,keeping supply
unchanged.The market
price for that product goes
up.Shifting of the demand
curve depends upon a host
of other factors.
Here, the demand curve
shifts from D1 to D2 to the
right which pushes up the
price from P1 to P2 as the
producer knows that
consumers would buy his
product anyway and hence,
the output also increases
fromQ1 to Q2.

6. Instance of Increase in demand
This phenomenon can be
explained with a real life
scenario. Recently, our
Human Resources minister
has been talking about the
dearth of employable
graduates in India.The
supply of good MBAs thus
has been constantly low. IIM
graduates are highly
demanded in our country
because they are thought to
be as very effective and
efficient managers.They are
short of supply in our
country as they prefer to
work with foreign
companies abroad.This
inequality in demand and
supply is actually the reason
why they are paid very high
salaries.

7. Shifts in both demand and supply
curves
In most markets, both the
demand and supply curves shift
from time to time. Consumers,
disposable incomes change as
the economy grows( or
contracts, during economic
recessions).The demands for
some goods shift with the
seasons( fuels, cotton wears,
umbrellas), with changes in the
prices of related goods or simply
with changing tastes. Similarly,
wage rates, capital costs, and the
prices of raw materials also
change from time to time, and
these changes shift the supply
curve.
Shifts to the right of both the
demand and supply curves result
in a slightly higher price and a
much larger quantity. In general,
price and quantity will change
depending on how much the
demand and supply curves shift
and on the shapes of those
curves.

8. Continued…
In the initial stages of
launching the Apple
iPhone 4 in 2011, the
supply was very limited.
But demand from
consumers using high-
ended products was
pretty high as
compared to the
supply. So even if the
supply increased to
meet the rising
demand, it could not
meet so this shifted the
price upwards.This is
one of the reasons why
the gadget is very
costly.

9. Effect of substitutes on pricing
Two goods are substitutes
for which an increase in the
price of one leads to an
increase in the quantity
demanded of the other.
When the goods are perfect
substitutes like Nike and
Reebok shoes, if the price of
Nike shoes rise, then
demand for Reebok shoes
would rise. As both the
brands are well-established
in the market, consumers
would not thinking twice
before switching from Nike
to Reebok because they
know that Reebok would
provide comfortable shoes
as well.

10. Effect of complementary goods on
pricing
Two goods are
complements, for
which an increase in the
price of one leads to
decrease in the quantity
demanded of the other.
Suppose the price of
paint increases, the
demand for paint
brushes would fall along
with the demand for
paint colours falling.
Parents of young
children might prefer to
buy them pastel colours
than paint colours.

11. Effect of competition
The price that a firm sets is determined
by the competitiveness of its industry,
and the firm's profits are judged by
how well it balances costs to revenues.
The more competitive the industry, the
less choice the individual firm has when
it sets its price.
Perfect Competition - A large number of
firms produce a good, and a large
number of buyers are in the market.
There is little room for differentiation
between products, and individual firms
cannot affect price . Market price is the
price of the product.
Monopolistic Competition - A large
number of firms produce a good, but
the firms are able to differentiate their
products. There are also few barriers to
entry. Each firm has relative freedom
to set its own price.
Oligopoly - A relatively small number of
firms produce a good, and each firm is
able to differentiate its product from its
competitors. Barriers to entry are
relatively high.
Monopoly - One firm controls the
market. Because the firm controls the
entire share of the market , it can
charge any price.

12. CONCLUSION
We can analyse the economy by examining how the decisions of individuals and firms alter the types of
goods that are produced.Ultimately, it is the smallest segment of the market - the consumer - who
determines the course of the economy by making choices that best fit the consumer's perception of cost
and benefit.

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