Write
short notes on the following:
(a)
Product Differentiation
(b)
Equi - Marginal Principle
(c)
The Price Elasticity of Demand
Ans :
a)
Product Differentiation
Today, many
companies offer the same products and services. It may seem pointless to try to
compete in an environment in which numerous other companies are already
offering the same product or service you wish to sell. However, new companies
often do come into the market place and successfully sell products and services
that already existed in that market place. They are able to compete because
they use product differentiation.
Product differentiation is a specific kind of business and marketing strategy. It focuses on a target market in which competitors already offer similar products or services. A company that uses product differentiation tries to create the perception among certain target customers that the company’s version of this product or service is some how different and thus has added value that is not available from competitors.
Product differentiation is extremely important to running any kind of business. This is due to economic principals that have been demonstrated time and time again in nearly every market place. If the public perceives no difference between two competing products, then the only possible means of competition is through pricing.
In a situation such as this, products are viewed by customers as very easy substitutes for one another. If one product is more expensive than the other, the customer will simply purchase the cheaper product. She does this because she views no difference between them.
To compete, the company with the higher price will lower its price to the same level as the competition. Eventually, another company may ignore the standard price in the market and offer the same product at an even lower price. The other competitors have no choice but to lower their prices as well. They have to or they will lose their business. Eventually, this leads to a situation in which the prices are lowered to the point where no business in the market can make a profit off of that product.
Situations such as these present themselves in markets where products are relatively similar. For example, people generally don’t consider one brand of peas inherently superior to another. Due to this fact, they are likely to just purchase the cheapest brand. Entering into a business such of this doesn’t seem like a lucrative proposition. Gaining market share and producing a sizable profit will be very difficult.
The answer to this problem based on economic principals is to make your product seem different from the competition. If the customers do perceive a difference, one product is less likely to be a perfect substitute for another.
The ways a product can be differentiated from the competition are numerous. However, actual physical alteration of the product is not always necessary. For example, with the previous pea example, there seems to be little space for altering the actual product. A pea will generally be the same no matter where or how it’s harvested.
However, today, many consumers are highly conscious of the environment. They may, for example, be against the use of chemical pesticides and fertilizers in farming due to the effect that those chemicals can have on animals, plants, and human beings. These consumers tend to prefer purchasing what is known as organic vegetables that are harvested without the use of these synthetic chemicals.
If a grocer offers peas that are labeled as having been organically grown, product differentiation from peas that do not carry this label has been achieved. One may be hard pressed to find a difference by simply comparing the appearance of an organic pea to a non-organic grown pea. However, since the consumer perceives a difference between the peas due to this organic label, the non-organically grown peas cannot be a substitute. In this situation, the shopper who must have organically grown vegetables is much more likely to pay a premium for those organic peas.
Thus, through this product differentiation, the businesses that grow and sell these peas have escaped a situation in which they would only be competing in the market on the basis of price alone. Making a sizable profit in a crowded market place is once again possible.
Products can be differentiated through many different ways. This differentiation may for example take the form of different packaging. For example, certain beer drinkers may be receptive to a different can design with a wider mouth. It can also take the form of marketing. For example, a cell phone company may offer the same services to all age groups. However, it may target certain kinds of cell phones to teenagers and others to senior citizens.
The possibilities are nearly limitless. As long as a business can come up with a creative way to differentiate its product or service, gaining a competitive advantage is possible.
Product differentiation is a specific kind of business and marketing strategy. It focuses on a target market in which competitors already offer similar products or services. A company that uses product differentiation tries to create the perception among certain target customers that the company’s version of this product or service is some how different and thus has added value that is not available from competitors.
Product differentiation is extremely important to running any kind of business. This is due to economic principals that have been demonstrated time and time again in nearly every market place. If the public perceives no difference between two competing products, then the only possible means of competition is through pricing.
In a situation such as this, products are viewed by customers as very easy substitutes for one another. If one product is more expensive than the other, the customer will simply purchase the cheaper product. She does this because she views no difference between them.
To compete, the company with the higher price will lower its price to the same level as the competition. Eventually, another company may ignore the standard price in the market and offer the same product at an even lower price. The other competitors have no choice but to lower their prices as well. They have to or they will lose their business. Eventually, this leads to a situation in which the prices are lowered to the point where no business in the market can make a profit off of that product.
Situations such as these present themselves in markets where products are relatively similar. For example, people generally don’t consider one brand of peas inherently superior to another. Due to this fact, they are likely to just purchase the cheapest brand. Entering into a business such of this doesn’t seem like a lucrative proposition. Gaining market share and producing a sizable profit will be very difficult.
The answer to this problem based on economic principals is to make your product seem different from the competition. If the customers do perceive a difference, one product is less likely to be a perfect substitute for another.
The ways a product can be differentiated from the competition are numerous. However, actual physical alteration of the product is not always necessary. For example, with the previous pea example, there seems to be little space for altering the actual product. A pea will generally be the same no matter where or how it’s harvested.
However, today, many consumers are highly conscious of the environment. They may, for example, be against the use of chemical pesticides and fertilizers in farming due to the effect that those chemicals can have on animals, plants, and human beings. These consumers tend to prefer purchasing what is known as organic vegetables that are harvested without the use of these synthetic chemicals.
If a grocer offers peas that are labeled as having been organically grown, product differentiation from peas that do not carry this label has been achieved. One may be hard pressed to find a difference by simply comparing the appearance of an organic pea to a non-organic grown pea. However, since the consumer perceives a difference between the peas due to this organic label, the non-organically grown peas cannot be a substitute. In this situation, the shopper who must have organically grown vegetables is much more likely to pay a premium for those organic peas.
Thus, through this product differentiation, the businesses that grow and sell these peas have escaped a situation in which they would only be competing in the market on the basis of price alone. Making a sizable profit in a crowded market place is once again possible.
Products can be differentiated through many different ways. This differentiation may for example take the form of different packaging. For example, certain beer drinkers may be receptive to a different can design with a wider mouth. It can also take the form of marketing. For example, a cell phone company may offer the same services to all age groups. However, it may target certain kinds of cell phones to teenagers and others to senior citizens.
The possibilities are nearly limitless. As long as a business can come up with a creative way to differentiate its product or service, gaining a competitive advantage is possible.
b)
Equi - Marginal Principle
The Law of
Equi-Marginal Utility is an extension to the law of diminishing marginal
utility. The principle of equi-marginal utility explains the behavior of a
consumer in distributing his limited income among various goods and services.
This law states
that how a consumer allocates his money income between various goods so as to
obtain maximum satisfaction.
Let us assume
there are only three commodities available in the market, A, B and C. Also
assume that Tom has a daily income of only $15 to spend and that he can exactly
order his utility preference for each of the three products. Product A costs $1
per unit, Product B costs $3 per unit and Product C costs $5. Note that
diminishing marginal utility sets in immediately for each of the three
products. Marginal utility information is described on per $ basis, because a
consumers choice are influenced not only by the amount of additional utility
that successive units give him but also how many dollars he give up to get
them.
Let us consider
each dollar spent. Marginal utility per dollar shows that one dollar spend on
Product A provides the highest satisfaction of 20 utils as opposed to only 12
and 8 utils from products B and C, respectively.
Second dollar spends again
buys the highest utility of 15 utils. However, when Tom spends the third
dollar, a switch to Product B promises 15 utils of added satisfaction as
opposed to 11 utils from Product A. Following the principle, the best
combination Tom can purchase with $15 would be 4 units of A, 2 units of B and 1
unit of C. The total utility generated would be 154 utils. $4 spent on A give
54 utils of satisfaction; $6 spent on Product B gives 60 utils and $5 spent on
C gives 40 utils. This gives a total of 154 utils. No other combination will
result in as high utility as this with an expenditure of $15.]
The results from
the table above can be generalised to n commodities and the following condition
should hold in equilibrium:
a)
The Price Elasticity of Demand
The law of
demand states that that there is and inverse relationship between price and
quantity demanded. However, it does not explain as to how much change will
take place in demand as a result of a given change in price. In the case of
some commodities, a slight change in price may lead to a considerable change in
its demand while in the case of some other commodities a considerable change in
price may lead to a slight change in its demand; the concept of elasticity of
demand explains the definite relationship between changes in price and demand.
The change in
quantity demanded due to change in price is known as elasticity of demand. In
other words, elasticity of demand indicates the responsiveness of the consumer
which is reflected in the form of changes in demand as a result of changes in
price.
Stonier &
Hague have defined elasticity of demand in the following words:
"Elasticity
of demand is a technical term used by economists to describe the degree of
responsiveness of the demand for a good to a change in its price".
Thus in short,
elasticity of demand may be defined as the degree of responsiveness of demand
for change in the price of a commodity. Mathematically, it is the ratio of
proportionate change in demand to proportionate change in price.
TERMS
- price elasticity of demand
A measure used
in economics to show the responsiveness, or elasticity, of the quantity
demanded of a good or service to a change in its price.
- elastic
Generally, an
elastic variable is one which responds a lot to small changes in other
parameters. In more technical terms, it is the ratio of the percentage change
in one variable to the percentage change in another variable. It is a tool for
measuring the responsiveness of a function to changes in parameters in a
unitless way.
- elasticity
The sensitivity
of changes in a quantity with respect to changes in another quantity.
EXAMPLES
- If the price of butter increases by
2%, but the demand response is only to decrease the quantity demanded by
0.5%, butter is said to have an inelastic demand.
- In economics, we are often
interested in how people respond to price changes. Consider the owner of a
shoe store. In order for the owner to determine the optimal price for a
pair of shoes, she needs to know how consumers react to changes in the
price of that pair of shoes. In the language of economics, she needs to
know how demand for the pair of shoes changes as the price of the shoes
changes. In economics, there is a term for this concept: The price
elasticity of demand.
- The price elasticity of demand is a
measure of the responsiveness, or elasticity, of the quantity demanded of
a good or service to a change in its price. More precisely, it gives the
percentage change in quantity demanded in response to a one percent
increase in price, holding constant all other determinants of demand.
- If the price elasticity of demand
is less than one, we say that demand is relatively inelastic. This means
that if the price of the good changes, the demand for that good doesn't
change too much. If the price elasticity of demand is greater than one, we
say that demand is relatively elastic. This means that if the price of the
good changes, the demand for that good changes considerably (Figure 1).
- For
the example of the shoe store owner, demand for shoes would be inelastic
if, after the store owner raised the price of a pair of shoes by 1%, the
number of pairs of those shoes sold decreases by less than 1%. Demand for
shoes would be elastic if, given the same price change, the number of
pairs of those shoes sold decreases by more than 1%.
