D.3 Pricing and Output Decisions

D.3 Pricing and Output Decisions

Unit 1: Exploring Business

“Watch your thoughts, they become your words; watch your words, they become your actions; watch your actions, they become your habits; watch your habits, they become your character; watch your character, it becomes your destiny.”​

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― Lao Tzu 

Today we will

• Remember what we did last week

• Do the 2020 Business Quiz

• Recap Price Elasticity of Demand

• D.3 Pricing and Output Decisions

Open Ended

What can you remember from last week's lesson?

Business Quiz 2020

Multiple Choice Questions of the last 12 months

Multiple Select

Which famous US singer helped fund the development of the Moderna coronavirus vaccine with a $1m donation?

• Miley Cyrus

• Billie Eillish

• Dolly Parton

• Dua Lipa

Multiple Select

Rishi Sunak grabbed the headlines in July after the Treasury released photographs of the chancellor preparing for his summer economic update, with something expensive on his desk. What was it?

• A bronze bust of Margaret Thatcher

• A Byron burger takeaway

• A "smart mug" costing £180

Multiple Select

Several household names have killed off long-running catalogues this year, but which retailer will still be printing its traditional shopping guide in 2021?

• Argos

• Next

• IKEA

Multiple Select

The coronavirus pandemic has plunged Britain’s economy into one of the deepest recessions in history, with a decline in gross domestic product (GDP) of 11.3% forecast for this year. When did the economy last shrink by more?

• 1709 - The Great Frost

• 1815 - End of the Napoleonic War

• 1918 - End of the 1st World War

Multiple Select

How much beer was pubs forced to pour down the drain due to coronavirus restrictions, according to the British Beer & Pubs Association?

• 70m pints

• 70m barrels

• 70 Olympic-sized swimming pools

Multiple Select

Tesla entrepreneur Elon Musk said the brain of which animal had been implanted with a computer chip, as part of his Neuralink venture?

• Harriet the sheep

• Gertrude the pig

• Frances the rat

Multiple Select

Leaked internal emails between employees working on the Boeing 737 Max said the aircraft had been designed by:

• Rocket scientists

• Clowns

• A team of former pilots

Multiple Select

Where does the UK's richest person live?

• Buckinhgham Palace

• One Hyde Park

• Monaco

Multiple Select

Which boss described their company’s workers as “the new rock stars”?

• David Potts, chief executive of Morrisons

• Pascal Soriot, chief executive of AstraZeneca

• Will Shu, chief executive of Deliveroo

Multiple Select

Why are cauliflowers hard to harvest for robots, according to the Plymouth University spin-out Fieldwork Robotics, which is developing a robot picker?

• The leaves that curl up over the head make it much harder for a robot to determine ripeness.

• Cauliflowers are too big to grip for normal robot arms

• Cauliflowers are firmly stuck in the ground and are hard to extract

Multiple Select

Regina nine-pack toilet rolls have an RRP of £2.49. In March, an eBay seller was selling dozens of the packs at what price?

• £10.99

• £12.99

• £23.99

Multiple Select

The coronavirus pandemic has plunged Britain’s economy into one of the deepest recessions in history, with a decline in gross domestic product (GDP) of 11.3% forecast for this year. When did the economy last shrink by more?

• 1709 - The Great Frost

• 1815 - End of the Napoleonic War

• 1918 - End of the 1st World War

Recap on Price Elasticity of Demand

But first what is a Recession?

Open Ended

What do you think a recession is?

Go to your OneNotes - Lesson 14

And try to answer the following:

• When did things begin to change with the value of Bronze? 

• What is another term for economic crisis? 

• Define a Recession in your own words 

• How is the relationship in supply and demand reflected? 

Recap on Price Elasticity of Demand​

"Elasticity is a measure of the extent to which a quantity responds to a change in a variable."​

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The responsiveness of Demand to a change in price.

Elastic

Percentage change in demand will be greater < than change in price.

Inelastic

Percentage change in price greater than change in Demand.

Open Ended

What is elasticity?

Price Elastic Goods

• Very responsive to changes in price​

• Many substitutes (undifferentiated)​

• Availability of products wide

Price Inelastic Goods 

• Less responsive to Price changes (but still affected by price rises)​

• Highly branded (highly fashionable) ​

• Innovative 

• ​In short supply

• Few Substitutes

• Habit Forming

Price Elasticity of Demand Calculation

Economists use the term 'price elasticity' to measure the relationship between the quantity in demand and change in pricing. The formula for this calculation is​

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P.E.D. =  Percentage change in Demand/Percentage change in Price

Price Elasticity of Demand Calculation (Cont.)

If a small change in price is acconpmained by a large change in the quantity demanded, the product is said to be elastic (or responsive to price changes). ​

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Alternatively, a product is inelastic if a large change in price is accompanied by a small amount of change in the quantity demanded.

Price Elasticity of Demand (PED)

• There is an inverse (negative) relationship between price and demand​

  
  

• As price goes up demand goes down​​

• As price goes down demand goes up​

Price Elasticity of Demand (PED)

But by how much? Is the change in demand more than proportional to the change in demand or less than proportional?

Price Elasticity of Demand (PED)

Price elastic demand means that a change in price will lead to a more than proportional change in demand i.e. demand is sensitive to price changes​

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Price inelastic demand means that a change in price will lead to a less than proportional change in demand i.e. demand is not so sensitive to changes in price

Open Ended

As the price goes up what happens to demand? ​​

Open Ended

If the price goes down what happens to demand?​

P.E.D Activity on OneNote Lesson 14

Try your best!

D.3 Pricing and Output Decisions

The end of Learning aim D

In this topic, you will learn about

• Impact on pricing and output decisions in different market structures​

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• Responses by business to pricing and output decisions of competitors in different market structures

Pricing and Output Decisions

Pricing and output decisions are affected by:​

Demand ​

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If demand is high businesses will either:​

Increase output to match demand​

Increase price to lower demand​

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Which action they take will depend on the ability to increase output e.g. spare capacity, the availability of raw materials and the price elasticity of demand

Open Ended

If demand is high businesses what two things can they do to respond to this?

Pricing and Output Decisions (Cont.)

New firms may be attracted into the market​

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Price elasticity of demand​

A firm will increase price if the product is inelastic or reduce price if elastic

Market structures i.e. perfect or imperfect competition

In perfect competition the firms will be price takers i.e. the price set will be determined by the market with no firm able to set the price​

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In imperfect competition the firms will be price setters i.e. one firm is likely to set price and others will follow​

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In a monopoly a business may set the price high and limit output, however, this may be regulated in order to stop a business from using its power to exploit the customer 

Multiple Select

In imperfect competition the firms will be price setters

• True

• False

Pricing and Output Decisions

We have been looking at how market structures and pricing and output decisions relate to perfect and imperfect competition business in different way.s ​

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Perfect competition businesses are usually so small that they are unable to affect price because the prices for their products are predetermined and then the price, they pay to suppliers is also unlikely to be negotiable. 

Pricing and Output Decisions (Cont.)

However, imperfect competition businesses may have more influence over both pricing and output decision making. ​

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Businesses can use a range of strategies to increase their profits based on either the price they charge for their products and service or the price they are willing to pay for output such as goods, services and labour. ​

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Depending on the type of business, what is output to one business can be input to another depending on whether goods are coming in or out. Some of the strategies businesses use are outlined below.

Open Ended

Why do you think some businesses might sell their products or service a a lower price compared to their competitors?

Loss Leaders

Loss leader = a product or service offered at a knockdown price, possibly even at a loss to the business. This is done to attract additional sales and increase profits and market share. ​

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Businesses may introduce loss leaders, for example:​

Estate agents, especially those selling large numbers of new housing for developers, may offer one house as a loss leader, especially if house sales have been slow or non-existent. 

More strategies

Retailers may offer bargains on product lines which are slow to move​

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In the travel industry, for example, airlines will sell cheap flights or train companies may promote bargain prices for first-class seats rather than run empty carriages​

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Restaurants and bars promote happy hour to attract customers at quiet times or to shift excess stock.​

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As you know, businesses need to keep their eye on the competition to make informed decisions. 

Responses by business to pricing and output decisions of competitors in different market structures

Businesses with a perfect competition structure are too small to influence changes to prices as they hold a small share of the market. 

Responses by business to pricing and output decisions of competitors in different market structures

Imperfect competitive structures can influence pricing by forcing suppliers to reduce costs when demand increases, or the cost of raw materials decreases. 

Responses by business to pricing and output decisions of competitors in different market structures

Factors that contribute to their ability to influence output decisions to include the:​

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Cost of production;​ Environment​; Market power

Have a good break!