Demand, Supply and Pricing Strategies
In economics, the term “market” denotes a forum where the buyers and sellers interact with each other and reach to a mutually agreeable situation regarding price and quantity of a good or a service. The demand curve, reflecting the buyers’ side, shows the willingness of the buyers to buy a commodity at different level of prices (Hall and Lieberman 2012). On the other hand, the supply curve, in the market shows the dynamics in the sellers’ side, which reflects the willingness of the sellers to sell their commodities or services at different level of prices. The equilibrium in the market, defined as the point of mutual agreement between the buyers and the sellers, occur in the economy where the demand and the supply curve intersects and the willingness to buy of the buyers matches with the willingness to sell of the sellers (Baumol and Blinder 2015).
Keeping this in consideration, it can be asserted that there are immense significance of the pricing strategies taken by the sellers in the market as the prices of the commodities and services offered by the sellers act as one of the primary determinants of the demand for the commodities by the customers. The sellers, often take this into consideration while designing their pricing strategies to win over their competitors (Nicholson and Snyder 2014).
The essay tries to take into account this aspect of pricing strategies, other microeconomic factors including the economies of scale, price discrimination and nature of market prevailing, and tries to discuss how these microeconomic factors affect the demand and supply dynamics in the market of an economy. To discuss the same, the essay uses the reference of Amazon, one of the global corporate giants in the contemporary global economic scenario and discusses the positive as well as negative aspects of their pricing strategies.
In Microeconomics, the producer’s behavior in general emphasizes on the general objective of the firms in the market, in an overall framework. The primary objective of the sellers, in general is to maximize their profit or minimize their cost of productions. This can be achieved with the help of several mechanisms, which are related to the economic concepts including increasing demand, decreasing cost of production through more efficient production techniques, usage of optimum pricing strategies and others (Rader 2014).
In general, demand of a commodity increases if the price of that commodity falls, given that the commodity concerned is a normal good. This can be shown with the help of the following diagram:
Case study: Amazon
Figure 1: Changes along the demand curve due to changes in price of a product
(Source: As created by the author)
As can be seen from the following figure, when the price of a commodity falls, given that the commodity is a normal good (the demand curve for the same being negative), the demand for the same increases and the company starts earning more client base. This may in turn help in increasing their revenue and contribute positively in their long run sustainability.
There are several factors, which help the firms to maximize their profit levels, by decreasing their prices of the products by helping in making their production activities more cost efficient or by helping them to increase their revenues as much as possible, which are as follows:
a) Efficiency in resource allocation and utilization-Resources being scarce are valuable and a lot of the efficiency and profitability of a firm depends on how efficiently they use the factors of production which are available to them which includes labor, capital, land and entrepreneurship (Varian 2014).
b) Economies of scale-In many cases, the firms in the market enjoy cost advantages in the production of the commodities, which they offer, due to expansion in their operations and increase in the production of the same with time. This phenomenon is known as the economies of scale and is reflected in the lower costs of production of the succeeding units of the commodities, which goes on decreasing as the firms go on increasing their production (Athanassiou).
This in its turn often helps the firms enjoying the economies of scale to sell their outputs at prices which are much lower to the competitors present in the market. This often gives rise to a situation in the economy, which is known as natural monopoly. This especially exists in those sectors or industries, where the initial fixed cost of production is high and the variable costs decrease with time and increase in the production of the commodities. This can be seen in the following figure:
Figure 2: Increasing returns to scale and Natural Monopoly
(Source: As created by the author)
As can be seen from the above figure, due to the presence of economies of scale, the firm enjoying the same can produce at a much lesser cost and therefore, can sell at a much lesser price (Pmn<P1), than their competitors, thereby getting more consumers. This increases the demand of their product (Qnm>Q1), which increases their revenue (Nizovtseva 2013).
c) Price Discrimination-Price discrimination can be stated as the mechanism of charging different prices from different consumers for the same or similar commodity or service, based on the purchasing power and willingness to buy of the consumers. The sellers, in the contemporary global economic framework, often use this microeconomic tool to maximize their profits. The phenomenon of price discrimination can be explained with the help of the following diagram:
Figure 3: First Degree Price Discrimination
(Source: Cowan 2012)
The above figure shows the phenomenon, where the seller charges the customers on the basis of their maximum willingness to pay for a product and absorbs all the consumer surplus in this process. This is known as the first degree price discrimination. However, this being mostly hypothetical, there are several other more realistic forms of price discrimination like second and third degree price discriminations, under which price slabs are created or different prices are charged depending upon the elasticity of demand prevailing in different markets (Cowan 2012).
d) Updated Technology-Technological innovations and implementation of upgraded technologies also contribute positively in increasing the cost efficiency and output production of the companies and thereby enable them to utilize their existing productive resources more efficiently. This in its turn also help them in making efficient pricing strategies which in its turn increases the demand for the commodities or services provided by them and contribute to their profitability and long run sustainability.
The microeconomic concepts production activities, which contribute to the revenue maximization of the firms, are seen to be relevant in real case scenarios as the above discussed strategies are taken by many corporate enterprises in the contemporary globalized economy. One such example is that of the global commercial giant named Amazon.
Amazon, with the base at Washington, USA, is currently one of the largest e-commerce and cloud-computing giants in the world, which since its establishment in 1994, has expanded its operations rapidly. In the recent times is not only confined to being just a commercial enterprise, but also have tremendous implications on the economy of the USA and on the economic trends in the global scenario. The average annual revenue of the company is seen to be as high as $135.98 billion (2016) and the company employs nearly 541,900 people across the world, catering to the customers in every corner of the world.
One of the primary factors, which have been extremely beneficial for the company in expanding its operation, is the robust pricing strategy and the economies of scale, which the company enjoys in the market, due to its expansion in operation over the years and existence for over two decades. This along with the constant diversification and demand based production and pricing strategies have helped the company to earn a large share of loyal clientele across the world.
As can be seen from the above figure the company has experienced sustainable increase in the revenue over the years. The fact that competition has considerably increased in this industry with more and more players coming in the scenario did not affect the revenue generation of the company in concern that adversely can be due to their robust pricing strategies, marketing and the comparative cost advantages which Amazon enjoys in this industry (Hannak et al. 2014).
Conclusion
From the above discussion, it can be asserted that in the market and demand supply dynamics, pricing strategies and cost effectiveness in production play considerably important role in determining the overall performance of any commercial enterprise in terms of the productivity, cost effectiveness, profitability and long run sustainability of the same in the industry.
References
Athanassiou, M., Economies of Scale. Wiley Encyclopedia of Management.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Cowan, S., 2012. Third?Degree Price Discrimination and Consumer Surplus. The Journal of Industrial Economics, 60(2), pp.333-345.
Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.
Hannak, A., Soeller, G., Lazer, D., Mislove, A. and Wilson, C., 2014, November. Measuring price discrimination and steering on e-commerce web sites. In Proceedings of the 2014 conference on internet measurement conference (pp. 305-318). ACM.
Ignat, I. and Maha, L.G., 2012. E-Commerce across United States of America: Amazon. com. Economy Transdisciplinarity Cognition, 15(1), p.252.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.
Nizovtseva, I., 2013. Index of the economic interaction effectiveness between the natural monopoly and regions. I. Math Model.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
