Marketing Begins with Economics Unit 3

Economic Understanding The marketing process is scientific Relies on the principles and concepts of economics Knowledge of economics and economic decisions: Improves marketing decision making Increases customer satisfaction Increases profits for the company

Basic Economic Problem Peoples wants and needs are unlimited Wants and needs are never completely satisfied Resources are limited There is never enough available to meet everyone’s wants and needs Unlimited wants and needs, combined with limited resources, results in scarcity Choices must therefore be made Scarcity is the basic economic problem

Economic Questions All economies must answer 3 questions: What goods and services will be produced? How will they be produced? For whom will they be produced? An economy organizes the use of limited resources in a way that will satisfy the individual and group needs of people in the economy

Economic Systems Economies are organized into different economic systems based on how those questions are answered The type of economic system determines who owns the resources Also determines how decisions are made regarding: The use of resources Which needs are satisfied How resources are distributed

Economic Systems Cont. Command Economy: the gov’t answers the 3 questions It attempts to own & control important resources Free Economy: also known as market economy or capitalism, resources are owned by individuals rather than the gov’t No attempt at gov’t regulation or control Mixed Economy: some goods and services are provided by the gov’t and some by private enterprise The U.S. economy and the economies of most other nations in the world are mixed economies

Private Enterprise Economy Private Enterprise: based on independent decisions by businesses & consumers with only a limited gov’t role Businesses have much independence Decisions made will determine whether they succeed or fail

Characteristics of Private Enterprise Resources of production are owned & controlled by individual producers Producers use the profit motive to decide what to produce Individual consumers make decisions about what will be purchased to satisfy needs Consumers use value in deciding what to consume Gov’t stays out of exchange activities between producers and consumers Profit motive: refers to the use of resources to obtain the greatest profit Value: is an individual view of the worth of a product or service

Consumers & Private Enterprise Consumers determine what products and services will be successful in an economy Consumers create demand for products and services They select the ones that will provide the greatest satisfaction for the price They gather information about available products and services Consumers: individuals who purchase products and services to satisfy needs Demand: a relationship between the quantity of a product consumers are willing and able to purchase and the price

Producers & Private Enterprise Producers create a supply of products and services Supply: a relationship between the quantity of a product that producers are willing and able to provide and the price Producers gather info. About the types of products & services consumers want so they can provide those that are most likely to be purchased Producers: businesses that use their resources to develop products and services Gathering info. example: athletic shoe manufacturer determines based on research of popular athletic activities that they will sell more cross-training shoes

Micro vs. Macroeconomics Economics operates on two levels: Macroeconomics: studies the economic behavior in the economy Big picture Microeconomics: examines the relationships between individual consumers and producers looks at small parts of the total economy Marketers are most concerned about microeconomics Looks at supply, demand, and the level of individual product prices Macroeconomics helps to determine if society’s resources are being used as effectively and efficiently as possible studies the decisions of all consumers and producers and the effects of those decisions on the economy Microeconomics studies how individuals make decisions about what to produce and what to consume

Demand of a Product Factors affecting demand: If a need/want is particularly important/strong, consumers may be willing to spend more $$$ The amount of the product or service available If a large amount of product is available, consumers will usually place a lower value on it The availability of alternative products that consumers believe will satisfy their needs If several options seem to be equally satisfying, consumers are more careful about how much they pay

The Demand Curve Law of Demand: when the price of a product is increased, less will be demanded When the price is decreased, more will be demanded Demand Curve: shows the relationship between price and the quantity demanded

Elasticity = (% change in quantity / % change in price)

Product Supply Factors influencing what & how many products/services a business will produce: The possibility of profit The amount of competition The capability of developing & marketing the products/services Businesses use the resources available Economic Resources: natural resources, capital, equipment, and labor

The Supply Curve Law of Supply: when the price of a product is increased, more will be produced. When the price is decreased less will be produced

Intersecting Supply & Demand What would happen if the price was greater than or less than $10 If the price is greater than $10, say $20: The quantity demanded = 210 and the quantity supplied = 700. The result would be a huge surplus of 490 pizzas produced with no one willing to buy them for $20. If the price is less than $10, say $5: the quantity demanded = 650 and the quantity supplied = 300. The result would be a shortage of 350 pizzas.

Economic Competition Two characteristics help determine the type of economic competition in a specific market: The number of firms competing in the market The amount of similarity or difference between the products of competing businesses

4 Forms of Economic Competition Pure Competition: many suppliers offer very similar products Consumers have high control over choices & prices Prices are very competitive Pure competition: agricultural products like corn, rice, wheat, livestock; low-priced consumer products: milk, bread, paper clips, bottled water

4 Forms of Economic Competition Monopoly: one supplier offers a unique product The supplier has almost total control and the consumer will have to accept what the suppliers offers at the price charged There is a lack of competition There is a fixed demand Gov’ts attempt to control monopolies Examples (though few): utility companies that supply communities with electricity, gas, or water Geographic monopolies

4 Forms of Economic Competition Oligopoly: a few businesses offer very similar products or services The demand curve for 1 business resembles that of pure competition The demand curve for all of the business combined in an oligopoly resembles that of a monopoly Oligopoly examples: airline industry, automobile manufacturers, insurance companies, interstate delivery services, computer manufacturers, internet service providers. Local level examples: taxi services, movie theaters, banks, and hospitals

4 Forms of Economic Competition Monopolistic Competition: there are many firms competing with products that are somewhat different Most common The fewer the differences between products, the less control the business has The fewer the number of competitors and the greater the differences among the competitors’ products/services, the greater the control each firm will have in the market Examples: restaurants, automobile dealerships, athletic shoes, consumer electronics, cosmetics.

Understanding the Competition A business in pure competition will not be able to exercise much control in the market One in a monopoly will have almost total control Businesses in an oligopoly must pay careful attention to the actions of competitors Those in monopolistic competition must understand the importance of the differences between competing products

Economic Utility To analyze how people make choices among competing products, we use Economic Utility Products that provide great satisfaction have a higher economic utility Businesses use economic utility to increase the chances that consumers will buy their products

How to Increase Economic Utility Form Utility Results from changes in the tangible parts of a product/service Time Utility Results from making the product/service available when the customer wants it Place Utility Making products/services available where the consumer wants them Possession Utility Results from the affordability of the product/service Form: one product may be constructed better or have features consumers want; a hair stylist may be more skilled than another Time: a bank that stays open in the evening and a cable tv service that provides movies on demand Place: a convenient location Possession: there are ways to make the product more affordable without cutting price; credit, leases (think cars), renting (think tuxedos) Economic Utility can be a particularly effective marketing tool when a business focuses on the unique needs and characteristics of each target market Marketers need to determine what changes customers would like to have in products/services in order to develop an effective marketing mix