Microeconomics: Consumer Surplus and Price Setting

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Questions and Answers

What is the primary consideration for a business organisation when setting prices for its products or services?

The price set by the government for similar products

The cost of production and distribution

The value perception of the customer in terms of the benefits offered (correct)

The price of the competitor's product

Which of the following is a characteristic of a price maker?

The ability to set prices based on demand and supply

The ability to set prices based on government regulations

Influence on the decision about the prices they charge (correct)

No influence on the decision about the prices they charge

What is the primary purpose of the Price Discrimination Regulations and Buyer Power Regulations 2018?

To protect consumers from price discrimination (correct)

To promote price fixing among competitors

To regulate the pricing of essential goods

To promote fair competition among businesses

What is the key consideration for a business organisation when setting prices for a target market?

The important criteria that customers consider when making a purchasing decision Signup and view all the answers

What is the term for the practice of creating the impression that consumers are receiving a bargain when it is not the case?

Deceptive pricing Signup and view all the answers

What is the primary purpose of the Competition Act 89 of 1998?

To promote fair competition among businesses Signup and view all the answers

What is the primary goal of using frenzy pricing?

To create a sense of urgency and excitement in the target market Signup and view all the answers

What is the difference between a price maker and a price taker?

A price maker sets prices based on their own costs, while a price taker sets prices based on competitors' prices Signup and view all the answers

What is the purpose of determining demand in the pricing process?

To determine the optimal price for the product Signup and view all the answers

What is the main advantage of using a two-part pricing structure?

It allows for price discrimination Signup and view all the answers

What is the difference between pure bundling and mixed bundling?

Pure bundling offers a single price for multiple products, while mixed bundling offers different prices for each product Signup and view all the answers

What is the first step in the process of setting a price?

Select the pricing objective Signup and view all the answers

What is the main disadvantage of using going-rate pricing?

It does not consider the costs of production Signup and view all the answers

What is the purpose of estimating costs in the pricing process?

To determine the cost structure Signup and view all the answers

What is the primary goal of a profit-oriented pricing objective?

To achieve the highest possible profits Signup and view all the answers

What is the main characteristic of a market-skimming pricing strategy?

Setting a high introductory price to attract a customer base with a prominent desire for the product Signup and view all the answers

What is the primary objective of a market penetration pricing strategy?

To attract a large customer base by setting low prices Signup and view all the answers

What is the main difference between a price maker and a price taker?

A price maker has the ability to influence the market price, while a price taker has to accept the market price Signup and view all the answers

What is the illegal practice of pricing referred to in the text?

Predatory pricing Signup and view all the answers

What is the primary consideration when using a demand-plus pricing strategy?

The value that consumers seek in the product Signup and view all the answers

What is the purpose of conducting break-even analysis in pricing?

To determine the point at which the product becomes profitable Signup and view all the answers

What is the primary focus of target pricing?

The return on investment Signup and view all the answers

Study Notes

Pricing Strategies

Consumer surplus: the extra need-satisfaction consumers get
Price takers: no influence on pricing decisions, influenced by external factors (e.g. government-set prices for petrol)
Price makers: have control over pricing decisions (e.g. a cafeteria setting prices for products)

Price Setting Guidelines

Consider the benefits customers receive from the product/service
Consider important criteria customers consider when making purchasing decisions (e.g. quality, branding, convenience)
Consider the value perception of customers
Research competitors' offerings
Consider prevailing economic conditions

Legal Considerations

Price Discrimination Regulations and Buyer Power Regulations 2018
Competition Amendment Bill 2018
Competition Act 89 of 1998

Ethical Issues

Price fixing: consent amongst competitors on price increases/decreases
Price discrimination: charging different prices for the same product (e.g. student discounts)
Deceptive pricing: creating the impression of a bargain when it's not the case
Chain-mark-up pricing: pricing based on the markup each organisation sets in the production chain

Competitive Pricing Strategies

Going-rate pricing: basing prices on competitors' prices
Leadership pricing: setting prices that other organisations follow

Dynamic Pricing Strategies

Exchanges over the internet: sellers market products/services, and buyers bid on them
Alternative: buyers request a product/service, and sellers send bids

Advanced Pricing Strategies

Volume discount pricing: pricing per amount of goods purchased
Two-part pricing structure: set price for the first purchase, and linked changeable price for subsequent purchases
Bundle pricing: pure bundling (pricing based on packaging/extra features) and mixed bundling (mix of pricing schemes)

Frenzy Pricing

Creating over-demand by offering very low prices to create excitement among consumers

The Process of Setting a Price

Select the pricing objective
Determine demand
Estimate costs (variable and fixed, differential cost in differential markets, target costing)
Analyse costs, prices, and competitors' reactions
Select the most appropriate pricing method
Select the final price

Pricing Objectives

Profit-oriented goals: targeting ROI, maximising profits
Sales-oriented goals: selling more products, increasing market share
Stability-oriented goals: stabilising prices in the industry, meeting competition

Pricing Strategies for New Products

Market-skimming pricing strategy: high introductory price to attract high-end customers, then reducing prices to attract new segments
Market penetration pricing strategy: setting low prices to attract customers when introducing a new product/service

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Description

This quiz covers the concept of consumer surplus, price takers, and price makers in microeconomics, including factors that influence price setting.