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Micro Economics

Notes 14.5 Keywords

Cost-plus Method: Under this method, the price is set to cover costs (materials, labor and
overhead) and pre-determined percentage or profi t.
Customary Prices: Prices of certain goods become more or less fixed, not by deliberate action on

the sellers’ part but as a result of their having prevailed for a considerable period of time

Going Rate Pricing: In this method, the firm adjusts its own pricing policy to the general pricing
structure in the industry.

Marginal Cost Pricing: Under marginal cost pricing, fixed costs are ignored and prices are
determined on the basis of marginal cost.
Price: Price is the exchange value of goods and services in terms of money.
Psychological Pricing: In this method, the marketer bases prices on the psychology of consumers.
Many consumers perceive price as an indicator of quality. While evaluating products, buyers
carry a reference price in their mind and evaluate the alternatives on the basis of this reference
price. Sellers often manipulate these reference points and decide their pricing strategy.

Target Return Pricing: In this method, the firm decides the target return that it expects out of
business and then decides prices.
14.6 Self Assessment

Fill in the blanks:
1. In ………………… strategy, prices are high in early stages to recover costs as soon as
possible.

2. Under ………………….. method, price is set up to cover manufacturing costs plus a pre-
decided amount of profi ts.
3. In telecom sector, the companies often follow the ………………… pricing.

4. Some products are abruptly priced at 9.99 or 99.99. It is known as ……………….. pricing.
5. A consumer purchases more of a good if the price goes down and vice versa. This is known
as…………………..
State whether the following statements are true or false:

6. Most of the firms are uncertain about their demand curve.

7. Target return pricing is a variant of full cost pricing.
8. Marginal cost pricing permits a manufacturer to develop a far more aggressive pricing
policy than does full-cost pricing.
9. Companies adopt penetration pricing strategy when the demand tends to be inelastic.
10. Customary prices may be maintained even when products are changed.

14.7 Review Questions

1. “Pricing in real world is different from the economic prices that we study”. Justify
2. Compare and contrast the full cost pricing method and target return pricing method.

3. Analyse the relevance of marginal cost pricing method.

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