Key Factors Influencing Product Price and Output - Essay Example

Key microeconomic and macroeconomic factors that are likely to influence the price and output of that product over the next five years Introduction Microeconomic and macroeconomic factors have a large role to play in how a good is produced and sold. For the purpose of this paper I am choosing Givenchy as the company and their mascara ‘Phenomen’Eyes Effect Extension,’ which is a new product on their catalogues. This product is basically aimed at females aged 14 and above. With it Givenchy has tried to introduce a more innovative approach to making one’s eyelashes look fuller and longer. The product is a high priced luxury item which most the average woman cannot afford or buy on a whim. There are several key microeconomic and macroeconomic factors that have a heavy influence on the price and output of ‘Phenomen’Eyes.’ In the course of this paper these factors will be further explored and explained. The factors that affect the individual will be looked upon under microeconomics and can range a time span of less than a year. Where as the factors that affect the entire economy and will last five years or more will be looked over under macroeconomics (Mankiw, 1998). In short macroeconomic factors are centered on things which affect the nation i.e. inflation, interest rate, unemployment, exports and imports, where as microeconomic factors consist of those that affect people on an individual level e.g., personal income, preferences, price of competitor products. Microeconomic and Macroeconomic Analysis and price/output decisions To start with, microeconomic analysis aims to take a better look at how individuals and organizations work in any given economy, in our case this would be the economy of Australia. Here we look at the small scale issues and problems related to the decisions of prices and output for the Phenomen’Eyes. Prices here arte based on individuals and how they would act and react to the market and the product. The output is directly linked to the demand that is being targeted. In this case, Givenchy is going after consumers who are interested in high end beauty products. The prices are based on their preferences; these individuals will most likely not be looking to invest in mascara that has a lower price tag on it because they associate money with quality. Similarly, because a relatively small amount of consumers are being targeted their demand will come in small numbers as well, which means that the production will not consist of a large scale massive operation. Demand the production is directly related here, the lower the demand the lower the number of units that will be produced and vice versa. The microeconomic analysis assumes that the consumers are acting with a proper rationale for all their actions and not going out on a spending spree (Blinder & Baumol, 2008). The elasticity of this good is relatively high because of its nature i.e. Phenomen’Eyes is price elastic, which means that slight changes or shifts in the demand can cause a large change in price. The macroeconomic analysis on the other hands looks at the bigger picture and how things are going to change in the long run. This is the study of the economy as a whole. Since it is a luxury item it does not affect the economy is a huge way like necessity would i.e. wheat. The production of this good creates jobs and promotes employment and is therefore beneficial for the economy, however, it does not contribute all that much to the GDP. It may bring in revenue from other countries and increase the NDP of the country, since it is designer mascara and will be exported all over the world wherever there is demand. Hence it will also increase the exports of the country and contribute to the positive change in the balance of payments. Demand and supply characteristics & market structure The Phenomen’Eyes is a luxury good, aimed at a specific niche that is interested in high end beauty products. The demand for this good is elastic i.e. if prices increase further the demand will fall. The supply is also elastic but not as elastic as the demand. The simple reason for the slight difference in the elasticity because the factory has already been set up, even if there is a huge fall in demand the change in supply will be relatively lesser as compared because a lot of money has already been invested in tools, machinery, equipment, human resources etc. that will continue to function. The figure shows how the mascara exists in monopolistic competition. Short-run equilibrium of the firm under monopolistic competition; the figure shows the short run environment in which the firm functions. It ensures that there is profit maximization at the point where their marginal revenue (MR) equals the marginal cost (MC). The price is formed at the point AC which is the average cost. Some may argue because there are several other mascaras in the market, while this is true, it is also a fact that none of them are offered at such a high price and aim a much wider audience. The only other competitor i.e. L’Oreal sits at almost half the price that Phenomen’Eyes is being sold at hence cannot really be considered competitions as such. Price elasticity of demand is basically how the quantity demanded responds to changes in the price of a good. Phenomen’Eyes as stated before has an elastic demand. Since it is a luxury good people are only going to be willing to pay a certain amount for it. This is not a necessity that has to be consumed at any given cost like sugar or wheat (Schotter, 2008), the diagram shows what a typical elastic demand curve would look like. The price has been set for people who like high end beauty products, but even they have a limit. A proper survey must have been done beforehand to ensure that the firm was not overcharging. As it is many people are complaining about the high price tag and how they can’t afford it. Since it is a designer label, they have an image to maintain and do not cater to the masses. But even their consumers have a limit and will only be willing to buy a product at a certain price. The Mascara currently costs around $41, if the company decided to double the price then its consumers would most likely shy away from it and opt for another brand. Similarly, if they dropped the price by half the amount then there will be a much higher number of people willing to buy it; however, it may lose its original niche in the process. The output is directly related to how many customers pricing attracts. Cross Price Elasticity of Demand refers to the way in which quantity demanded of one good responds in terms of the change in price of another similar good (Weerapana & Taylor, 2007). For example Phenomen’Eyes has a direct competitor in the shape of L’Oreal’s Explosion Mascara. However, any increase or decrease in the price of that mascara will not affect Givenchy’s product for the simple reason that it is priced way below Givenchy’s price to begin with. It’s at half the price that Phenomen’Eyes is being sold. The consumers that are interested in Phenomen’Eyes will most likely not bother with L’Oreal’s product because of its price alone. If for example L’Oreal decreases its price, people who were already ignoring it on the basis of price will not flock to buy it anymore than they were before. This product has very little to do with cross price elasticity of demand. Income Elasticity of Demand refers to the way in which quantity demanded changes in response to change in the income of the target market. If the income of the consumers falls then the demand will fall as well. The income and demand are directly related. They may even switch to the cheaper counterpart to Phenomen’Eyes i.e. L’Oreal’s Explosion mascara. The simple fact is that if the incomes of the consumers fall then their purchasing power will fall with it and therefore they will not be able to afford expensive luxury items like they were able to before (Sloman, 2006). The output strategy will be based on the income of the people that are being targeted. The company works for a profit motive and will not produce more than the required demand otherwise it will have to lower its prices to clear the shelves. At this point and time there is a financial crisis looming over most countries, and especially the west which is why the production is not being done in large numbers. Macroeconomic environment over the next five years The world is currently going through a major financial crisis but things seem to be taking a turn for the better. On its own the Phenomen’Eyes has been successful in this country but there have no prospects as such for exports and revenue from them has been low. If the company decides to jump on the band wagon and head for developing countries like India for cheap labour then over the next five years it might be able to develop the product at a lower price tag so that it can be made available to a much larger market internationally. This is not to say that they will have to give away the niche that they were targeting in the beginning, the problem is that in other parts of the world the same niche may find the product and its price tag way out of their budget and not buy it at all which will result in low sales and ultimately lower productions for those regions. Another factor we have to consider is that as a beauty product Phenomen’Eyes really has no future in both the macro and micro respect in the long run. At the micro level consumers will find other alternatives and a new innovation will come out, if not by Givenchy then by a rival company (of which there are plenty.) Reference Blinder, A. & Baumol, W. (2008) Microeconomics: Principles and Policy: Cengage Learning, 2008 Mankiw, N. (1998) Principles of microeconomics: Elsevier, 1998 Sloman, J. (2006) Economics: Financial Times Prentice Hall, 2006 Weeapana, A. & Taylor, J. (2007) Economics: Cengage Learning, 2007 Schotter, A. (2008) Microeconomics: a modern approach: Cengage Learning, 2008 Read More