ECONOMICS AND PRICING

Economics and Pricing

Economics and Pricing

Product Pricing

Demand is a curve that shows the amount of a product consumers are willing to purchase at a variety of different prices during a specific period of time. There is an inverse relationship between product price and demand. All else equal, as price falls, the quantity demanded increase, and as price rises, the quantity demanded decreases (McConnell, 40). All else equal is important in this statement. There are several determinants of demand other than price which are discussed below.

Utility

Utility is a measure of satisfaction or happiness from buying goods or services. The more utility there is the happier the person is. In this situation, the utility is the satisfaction which the consumer gets by watching television using his satellite dish.

Law of Diminishing Marginal Utility

Marginal utility is additional utility derived from each unit of goods acquired. According to the law of diminishing marginal utility, as consumption of a product increases there is a decrease in the marginal utility that person receives from each additional unit of that product. Since most consumers will only purchase one satellite dish, let's look at this in terms of number of channels. One channel is great. Two channels are twice as good as one, but the satisfaction gained from each additional channel diminishes as the number of channels increases. The satisfaction gained between the forty-ninth channel and the fiftieth is much less than the satisfaction gained from the first to second additional channel. For example, DirecTV has a basic package which they call Total Choice. This package includes 135 channels. One of their premium packages, Total Choice Premier, includes 215 channels (DirecTV 2005). The utility of each additional channel is diminished because the consumer can only watch one channel at a time and each additional channel has diminished marginal utility.

Determinants of Demand

Changes in buyer tastes- Satellite dishes have a number of advantages. For example, DirecTV has an offer called NFL Sunday Ticket which allows people all over the world to watch every NFL game in the season (DirecTV 2005). Cable only shows each game in certain regions. If consumers become more interested in football, they will be more likely to purchase a satellite dish. In this situation, demand for satellite dishes would increase.

Change in number of buyers- The change in the number of buyers does not affect the demand for satellite dishes. Satellite dishes are available to everyone. The only way this determinant could affect demand is if the population were to increase.

Change in income- As income increase, demand for satellite dishes will increase. As income decreases, demand for satellite dishes will decrease.

Change in price of related goods- A substitute for a satellite dish is cable television. If the price of cable were to increase, the demand for satellite dishes would increase because some consumers will switch from cable to satellite. The opposite is also true. If the price of cable were to decrease, the demand for satellite dishes would decrease.

Change in expectations- Consumers' expectation of a change in income ...