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  Read Lesson 3-3