In addition, companies are wise to consider what their competitors are selling the same product for. If a product is worth $50 and the competitor is selling the product for $49, then matching that $49 is essential unless there is a marketing strategy that promotes the product as being better than what the competitor is offering. Raising prices to a ridiculously high amount is not going to increase profits when many customers are going to ba able to find the same product somewhere else for less money. High prices must be justifiable for a market for the expensive product to develop.
One must also consider that consumers seeking a bargain will wait for price cutting to occur. Thrifty consumers are willing to wait until newer models are released so that the prices of the old model are slashed significantly. These are all factors that must be anticipated by the company when establishing what type of profit needs to be expected from the product and in what type of time frame. So, in a linear sense, as time progresses, it is wise for a company to sell output at the highest possible rate that can be justified by the current market. This is noticeable in the cell phone industry. With most cell phone companies, when one signs a contract, a free or reduced price cell phone is given to the customer at time of contract. In many cases though, money can be made on the contract signing with the sale of an upgraded phone. Most individuals with any extra money to spare are going to be lured in by the newest and most muti functional phone. This When these higher tech phones are released onto the market, they are typically very expensive. It is later when they are replaced in the commercials by a newer model that they are sold at more reasonable and reduced prices from their original release price. Customers will often find reduced price, used phones on e-bay.
"Elasticity of demand deals with the extent to which costs increase as demand increases." Certainly the video game industry is proof of this statement. When new gaming systems are released onto the market, advertisements explode all over television. Everyone marks the new system on their wish lists and the holiday seasons make it almost impossible to find and purchase whatever is the newest in gaming technology. The video game system companies are clever about advertisement and product testing. They make sure that anyone who has ever enjoyed playing video games in their life, feels the need for the latest system. As this demand increases, shortages follow. This sense of wanting something that you can't have right away causes an even stronger desire for the product and the several hundred dollars charged per system is justifiable. The prices of gaming systems are quite hefty when they are first released. The gaming companies make a huge margin of profit initially and once the prices of the systems are lowered such that almost anyone can afford one, the company has already made more than anticipated profits.
"Provided that price is large enough to cover marginal cost of production, sales should be made." The bottom line in any business is to turn a profit. It is important though at difficult economic times to break even. This means that selling a product for the price that it costs to produce. If a product costs a company $10 to produce, and the product is