Price management in the economy

Pricing strategies can offer both advantages and disadvantages in competition, determining the success or failure of a business.

Product pricing strategies play a crucial role in ensuring the establishment and development of a coherent institutional and structural framework for the financial market. (Source: Shutterstock)

Financial management is a prerequisite for a business's survival, maintenance, and growth, as profit, or the economy in general, is the core objective that almost all businesses strive for. In this process, product pricing is a fundamental driver for production, business operations, and commercial development. Therefore, businesses always prioritize building and developing strategies for determining the price of their products.

The importance of pricing strategy

Prices can be set to maximize profits and used to protect existing markets from new entrants. Pricing strategies can provide both competitive advantages and disadvantages for a company and often determine the success or failure of a business.

Marginal production cost and marginal revenue are economic measures used to determine the quantity and price per unit that will maximize profit. In pricing strategy, a firm must find ways to maximize profit through analysis of marginal revenue and production cost.

Economist Adam Smith asserted that the "invisible hand" of the market relies on price fluctuations to move resources to where they are needed. In this context, commodity prices play a crucial role in determining the efficient allocation of resources within the market system.

Price acts as a signal of shortages and surpluses, helping businesses and consumers respond to changing market conditions. Allocation efficiency is considered to occur when the marginal benefit from a good equals the marginal cost. This allocation efficiency is achieved at the output level where market price equals marginal cost. In other words, when the supply curve meets the demand curve.

If goods are scarce, prices tend to rise, reducing demand and encouraging companies to try to increase supply. Conversely, if goods are in surplus, prices tend to fall, encouraging buying and prompting companies to try to reduce supply. Additionally, prices help redistribute resources from goods with low demand to goods that are more valued by consumers.

In reality, the agricultural sector shows that crop failures lead to a decrease in agricultural production (the supply curve shifts downward, resulting in higher prices). In the short term, demand is not elastic with respect to price, so the decrease is only slight and insignificant. The situation will unfold in the opposite direction: a bumper harvest leads to an increase in the supply of agricultural products, causing prices to fall (undervalued) unless businesses implement diversification and market share expansion strategies.

However, in the long term, the market is not static. If prices rise, the profitability of agricultural production increases, and then businesses can earn super-profits because marginal revenue is greater than marginal cost.

These high prices act as an incentive for businesses to try to increase production. Therefore, over time, higher prices lead to more investment in the industry, and supply can increase again in the long term at a more affordable price for consumers.

Consumer behavior

Consumers play a crucial role as one of the three main actors in a market economy and have a strong impact on product prices. Conversely, prices also influence consumer behavior. The interaction between consumer behavior and the current high oil prices, caused by supply chain crises leading to reduced production, can be illustrated. In the short term, the demand curve is highly inelastic with respect to price.

However, coupled with the prolonged economic crisis and the depletion of global resources, the rising price of Brent crude oil will undoubtedly affect consumer behavior. Consumers will seek more fuel-efficient options, such as purchasing motorcycles or cars with better fuel economy, or using alternative means of transportation like bicycles or public transport, leading to a gradual decrease in fossil fuel consumption in the long term.

This could be a good opportunity for the green energy sector, and also a time for developing countries to leverage high technology to promote economies of scale in restructuring their transportation infrastructure towards public transport such as buses, trams, and high-speed rail. In the long term, along with increased investment in alternative energy and a continued decline in fossil fuel demand and production, fuel prices will fall according to market principles.

Key considerations in strategic planning

Theoretically, rising commodity prices can help the economy break free from dependence on traditional goods because prices signal businesses and consumers to seek alternatives, thus stimulating innovation. However, to further enhance the role and function of pricing in financial resource management, strategic pricing planning for products and services also needs to consider further research in the following three areas:

Firstly, with the presence of international factors, commodity prices may not reflect true social costs or benefits, especially for essential goods and services. Determining environmental impact costs and labor costs creates an attractive short-term business and investment environment, but harbors many long-term risks to the sustainability of the country's human resources and living environment. Therefore, this can lead to under- or over-consumption, resulting in inadequacies in the operation of a market economy and in the import and export of goods and services with countries with more developed market economies.

Secondly, there is inequality. Prices help shift resources to areas with the greatest demand, but can lead to unfair allocation, resource depletion, and environmental and social inequality. Particularly in an economy where land resources are owned by the entire population, determining prices in land use rights transactions depends heavily on planning and relevant legal regulations regarding land use purposes.

Furthermore, it should be noted that the real estate and financial markets are closely symbiotic in a market economy, so good price management in these two sectors is necessary to avoid crises. In addition, during times of natural disasters, armed conflicts, epidemics, etc., when essential goods and services are scarce, prices rise, affecting people's needs. In this scenario, a plan for equitable distribution is needed, rather than a distribution driven by profit and escalating market prices.

Thirdly, there are monopolies and vested interests. In situations of monopolies and vested interests, as well as an opaque competitive environment in areas such as real estate, privatization of state-owned enterprises, public investment, bidding, tariffs, the stock market, cross-ownership in banks and currency, etc., high or low prices may not reflect shortages or surpluses of goods, but rather the power of monopolies, insider trading, and manipulation. This leads to inefficient allocation due to speculative motives, corruption, etc., distorting market operations and causing economic stagnation.

It can be said that product pricing strategy plays a crucial role in ensuring the construction and development of a synchronized institutional and structural framework for the financial market. Financial capital management must first and foremost involve objective and accurate valuation to create liquidity, thereby maximizing the exploitation and promotion of all other resources such as production capital, human resources, social resources, and natural resources. This helps to foster positive innovation and creativity among people, as well as mobilize all capital resources for sustainable socio-economic development.

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