ENT II: 4.04 Set Prices

Price Floors and Ceilings

Government Intervention!

Price Floors and Price Ceilings are Price Controls imposed by the
government. These are government interventions in the free
market which change the market equilibrium (quantity supply =
quantity demand).

Price Floors

Price Floors: the minimum prices set by government for certain
commodities and services they believe are being sold in an unfair
market (too low of a price) and it aims to help producers that need
assistance.

Issues: when prices are set above the equilibrium price the quantity
supplied exceeds the quantity demanded, and results in excess
supply.

Why do you think that is?

Example: Milk (see slide 5)

Price Ceilings

Price Ceilings: Price that is set by the government, and is the highest
legal price that can be set for goods and services, labor, or financial
capital. A price ceiling keeps a price from rising above a certain level,
and the goal is to benefit consumers.

Issues: Price ceilings only become a problem when they are set below
the market equilibrium price. When this happens, quantity
demanded exceeds quantity supplied.

Examples: Rent (see slide 5)

The demand and supply schedules for lawn mowing:

1.

At what price is equilibrium?

2.

At what price is the supply higher than demand?

3.

At what price is the demand higher than the supply?

Checkpoint

The highest legal price that can be paid in markets for
goods and services, labor, or financial capital

1.Floors

2.Elasticity

3.Ceilings

4.Pricing Decisions

Checkpoint

An economic measure of the change in the quantity demanded or
purchased of a product in relation to its price change.

1.Exchange Price

2.Elasticity

3.Profit Margin

4.Pricing Objectives

Process for Setting prices

1.Selecting the Pricing Objective

2.

Determining the Demand

3.

Estimating Costs
a.

Variable and fixed costs

b.

Differential cost in differential market

c.

Target costing

4.

Analyze Competitors’ Costs, Prices and Offers

5.

Selecting the Pricing Method

6.

Selecting the final price

Pricing Objectives

Decide where to position your products/services - the clearer the
objectives, the easier it is to set prices.

Prices in one location where the economy is not good, high
unemployment etc, will force you to have lower prices than in locations
where the economy is booming and affluent people live.

Determining Demand

Each price leads to a different level of demand and has a different impact
on the company’s objectives, as we saw in the lawn mowing example.

Keep in mind, the higher the price, the lower the demand, as reflected on
the demand curve.

Estimating Costs

Estimating costs will consist of:

a. Variable and Fixed Cost: Price must cover variable & fixed costs. As

production increases costs may decrease; more raw materials may
mean lower prices, etc., so costs should be estimated at different
production levels.

b. Differential Cost in Differential Market: Firms must also analyze

activity-based cost accounting (ABC). ABC takes into account the costs
of serving different retailers as the needs differ from retailer to retailer.

c. Target Costing: TC is estimating a new product’s desired functions &

determines the price that it could be sold at. From this price the desired
profit margin is calculated. The goal is to get the costs into the target
range and maximize profit.

Analyzing Competitors’ Costs,
Prices, and Offers

Companies should benchmark its price against competitors, learn about
the quality of competitor’s offerings, & their costs.

In order to be competitive, you must analyze your competitors prices,
quality of their products/services, and extra incentives.

Selecting a Pricing Method

Various pricing methods are available to give various alternatives:

a. Markup Pricing: a 20% markup

b. Target Return Pricing: this is based on ROI

c. Perceived-Value Pricing: buyers perception of the product is key, what

the product is worth to the consumer is what sets the price.

d. Value Pricing: more for less philosophy

e. Going Rate Pricing: charge what everyone else is

f. Auction-Type Pricing: companies bid prices to get a job

Checkpoint

The process for setting prices includes all of the following, EXCEPT:
1. Determining demand

2. Determining supply

3. Estimating costs

4. Analyzing competitors costs, prices and offers

Checkpoint

Markup pricing is:

1.based on ROI

2.buyers perception of the product

3.A percentage markup

4.A more for less philosophy

Let’s talk about
Demand

Demand for products

Calculate the demand for goods based on your sales, publicly available data or your
own survey of consumers.

1.Estimate consumer demand based on sales. Calculate the average monthly sales
value of each item or group of items; this will give you an estimate of demand.

2.Estimate demand based on the Bureau of Labor Statistics' Consumer
Expenditure Survey. Select the expenditure table for a specific demographic
breakdown, such as age, income, place of residence or race -- you can also use the
total population value in each table for a picture of all Americans. Look at the value
for the specific type of product that you want to find the demand for and multiply it
by the number of people in the demographic.

3.Estimate the demand for a product using your own survey - Survey people in the
area that you operate, or nationally for a national business.

The END

Questions?