economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

, a price point is a point along the demand curve at which

demand In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...

for a given product is supposed to stay relatively high. The term "price point" is often used incorrectly to refer to a

price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...

Characteristics

Introductory

microeconomics Microeconomics is a branch of economics that studies the behavior of individuals and Theory of the firm, firms in making decisions regarding the allocation of scarcity, scarce resources and the interactions among these individuals and firms. M ...

depicts a demand curve as downward-sloping to the right and either linear or gently convex to the origin. The downward slope generally holds, but the model of the curve is only piecewise true, as price surveys indicate that demand for a product is not a

linear function In mathematics, the term linear function refers to two distinct but related notions: * In calculus and related areas, a linear function is a function whose graph is a straight line, that is, a polynomial function of degree zero or one. For di ...

of its price and not even a

smooth function In mathematical analysis, the smoothness of a function is a property measured by the number of continuous derivatives (''differentiability class)'' it has over its domain. A function of class C^k is a function of smoothness at least ; t ...

. Demand curves resemble a series of waves rather than a straight line. The diagram shows price points at the points labeled A, B, and C. When a vendor increases a price beyond a price point (say to a price slightly above ''price point B''), sales volume decreases by an amount more than proportional to the price increase. This decrease in quantity demanded more than offsets the additional revenue from the increased unit price. As a result, total revenue (price multiplied by quantity demanded) decreases when a firm raises its price beyond a price point. Technically, the

price elasticity of demand A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good ( law of demand), but it falls more for some than for others. Th ...

is low (inelastic) at a price lower than the price point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve). Firms commonly set prices at existing price-points as a

marketing strategy Marketing strategy refers to efforts undertaken by an Organizational structure, organization to increase its sales and achieve competitive advantage. In other words, it is the method of advertising a company's products to the public through an est ...

Causes

There are three main reasons for price points to appear: # Substitution price points #* price points occur at the price of a close substitute #* when an item's price rises above the cost of a close substitute, the quantity demanded drops sharply # Customary price points #* the market grows accustomed to paying a certain amount for a type of product #* increasing the price beyond this amount will cause sales to drop dramatically # Perceptual price points (also referred to as " psychological pricing" or as "odd-number pricing") #* raising a price above 99 cents will cause demand to fall disproportionately because people perceive $1.00 as a significantly higher price

Oligopoly pricing

In relation to customary price points, oligopolies can also generate price points. Such price points do not necessarily result from

collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...

, but as an emergent property of oligopolies: when all firms sell at the same price, any firm which attempts to raise its selling price will experience a decrease in sales and revenues (preventing firms from raising prices unilaterally); on the other hand, any firm in an oligopoly which lowers its prices will most likely be matched by competitors, resulting in small increases in sales but decreases in revenues (for all the firms in that market). This effect can potentially produce a kinked demand-curve where the kink lies at the point of the current price-level in the market. These results depend on the elasticity of the demand curve and on the properties of each market.

Characteristics

Causes

Oligopoly pricing

See also

References

Further reading