3-2 Prices and Consumer Choices- Describe three methods of setting prices in a

market economy- Explain how consumers’ buying strategies

affect demand and prices ina market economy.

How are prices set in a Market Economy?

Desired profit by producers. Consumers’ demand for a good or service. Businesses need to make a normal profit – A

profit that allows a business to survive and grow. A normal profit allows the business to meet

contingency needs and grow.

New Products

The amounts of money have been invested in new products Research and development (R&D) costs can be

extremely high.

When a new product is first introduced, the price will be set high to help recovery the R&D costs.

Pricing Cost Recovery Pricing – Setting an introductory price

high to recover the R&D costs. Cost-Plus Pricing - Setting a price based on production

cost plus markup. The markup is the profit margin or gross profit made from

selling the item.

Value-Based Pricing – Setting prices based on how much consumers are willing to pay.Companies may do market research to determine what the demand for a product will be

Market-Based Pricing – Setting prices to be competitive with prices of similar products currently being sold. Market-based pricing tries to match or beat the competition.

Product Differentiation

Product Differentiation is a strategy where sellers who have a similar product to others may try to market their product as different from or better the than other products. The seller tries to make their product more

desirable. The seller may charge a higher price because of

this.

Buying Strategies Affect Prices

Rational Buying is the process of selecting goods and services based on need, want, and logical choices.

Emotional Buying is the process of purchasing products based on desire rather than logic.

This often leads to remorse because you are sorry for your purchase because it wasn’t rational or thought out.

Impulse Buying is what happens when people buy something on the spur of the moment without thinking it through or planning the purchase.

Merchants typically display impulse items at key points, such as center aisles, the ends of aisles, or the check out areas.

Economizing and Optimizing

Economizing is when consumers are saving as much as possible and spending money only when necessary.

This strategy results in lower demand and lower prices.

Optimizing is getting the highest value for the money spent

May come from purchasing in large quantities

May come from purchasing high-quality products or services.

Demand is higher when prices are lower.

This can lead to overspending, which contributes to inflation.

Assignment

Due Wednesday, January 28 – pg. 91 questions 1-17.

Read Lesson 3-3