3. PRICE PRICE CALCULATION, DEMAND AND SUPPLY

Implementace cizojazyčných modulů za účelem profesního rozvoje středoškolských pedagogů v oblasti stavebnictví CZ.1.07/1.3.40/01.0040 Vysoká škola technická a ekonomická v Českých Budějovicích

3. PRICE – PRICE CALCULATION, DEMAND AND SUPPLY Annotation: The aim of the module is to explain price as an economic category and the ways of its development. Then there is explained the nature of calculation, its types and there are analysed individual items of the calculation formula. In relation to the market definition there is characterized the supply and demand and the factors that influence them. Key words: Price, calculation, calculation formula, market, demand, supply

Price – price calculation, demand and supply 1. Price It is the expression of the amount which the consumer spends in exchange for the benefit which he receives by purchasing a product or services.


When determining the price it is necessary to consider the internal aspects (e.g., objectives and business strategy, marketing objectives, the consistency between the elements of the marketing mix and the costs). The external factors include the nature and the structure of the market and demand, the costs, the price and the offer of the competition, or alternatively the expected behaviour of distributors. For pricing the company chooses one of three main methods:

a) Price oriented to costs b) Price oriented to competition c) Price oriented to demand

1.1 Price oriented to costs This is the most common and the simplest method of determining the price. This method is based on the costs and the profit is calculated by the percentage ratio to the costs. For accurate pricing, it is necessary to consider not only the production costs and the producer´s profit, but also the tax and trade margins.

Costs of production: 1. fixed (it does not change with any changes in production volume – e.g. rent, interest payments); 2. variable - it changes in response to changes in production volume: 

proportional (costs grow at the same rate as the production volume - e.g. labourers´ wage, direct material)



progressive (costs are rising faster than production volume - e.g. advertising costs)



regressive (costs are rising more slowly than the production volume – e.g. energy);


3. indifferent costs (have no relationship to the production volume – e.g. unexpected damages, shortages).

Total production costs consist of the sum of all costs items. 1.2 Calculation Examines and sets the prices in terms of the spent costs. Calculation is the preliminary determination or the subsequent detection of costs or prices on the calculation unit. As a calculation unit we consider the performance, which must be precisely defined by the volume and the content (e.g., 1 kg of bread, 100 bricks, etc.).

In terms of time, calculation is divided into: a) preliminary –it includes the estimated costs of a calculation unit and it shall be completed before the production begins. The basis data are the technical-economic standards of direct costs consumption and indirect costs budgets. b) resulting – it is drawn up after the performance and it contains the true costs spent on the calculation unit. The purpose is to compare the true spent costs with the costs pre-established in the preliminary calculation. The basis data are obtained from the internal accounting.

Calculation formula Calculations are compiled in individual items of direct and indirect costs, which make up the so called calculation formula. The structure of its items depends on the type of activity and its organization. The accounting unit chooses the calculation formula that suits best with particular conditions. The most commonly used calculation items can be summarized in the calculation formula as follows:


1. Direct material 2. Direct wages 3. Other direct costs 4. Factory overheads _____________________________ Proper production costs 5. Supplying overheads 6. Managing overheads _____________________________ Proper performance costs 7. Distribution costs _____________________________ Complete proper performance costs 8. Profit _____________________________ Sales price

Direct material means the basic material that goes into the value of the product and that can be directly determined on the calculation unit. E.g. wood for furniture.

Direct wages are wages that can be directly determined on the calculation unit (normally the wages of production workers for the worked day). E.g. Carpenter´s wage in manufacturing furniture.

Other direct costs are all other costs that can be directly determined on the calculation unit. E.g. payments of insurance from production workers´ direct wages.


Factory overheads are shared (overhead) costs that arise in the production department. E.g. depreciation of manufacturing machinery, their repairs, energy consumption in the production workshop, etc.

Managing overheads are shared (overhead) costs that arise in the administration of an enterprise as a whole. E.g. wages of technical-economic and administrative staff (managers, accountants), the cost of performance of communications (telephone, postal services), the costs of computer equipment, etc.

Supplying overheads are shared (overhead) costs associated with the supply of the enterprise and storage of the material. E.g. transport of material, wages of a warehouseman in the material stock, etc.

Distribution costs are shared costs associated with the sale and storage of goods. E.g. advertising costs, delivery of products to customers, etc.

1.2.1 Setting the costs on the calculation unit Direct costs are generally determined in the preliminary calculation according to the by technical-economic standards (material consumption standards, time consumption standards of production workers). For the overhead costs there is first determined their total volume (i.e., it is based on budgets), and out of that there is calculated the percentage corresponding with the particular calculation unit. At the same time different ways of calculation are used, e.g. calculation made by dividing, calculation made by dividing using the ratio number and surcharge calculation.


a) Calculation made by dividing - the simplest procedure for determining the indirect costs on the calculation unit in enterprises with homogeneous production. The total amount of budgeted costs is divided by the planned quantity of products. b) Calculation made by dividing using the ratio number – it is used if the company produces several types of homogeneous products, which differ only in dimensions, size, etc. One of the products, usually the one which is according to the importance or quantity the most significant, is selected to be the basic one. The production of all other products is recounted on that particular one using the ratio numbers. c) Surcharge calculation – is used in the production of several heterogeneous products with different costs. Overhead costs on the calculation unit are determined by using a margin, which represents the ratio of those costs to the cost-allocation base. The accounting unit sets this base itself. The attempt is usually to choose a cost-allocation base, which is directly proportional to the scheduled overhead costs. The costallocation base can be placed either in monetary terms (e.g., direct wages, direct material, total direct costs) or in natural form (e.g. machine hours, standard working hours of production workers).

1.3 Price oriented to competition It is based on copying the price of similar competing products. The set price may be higher (e.g. with branded goods), lower or at the same rate as the competition. The price difference over the competition is usually held constant. An example of this approach is a case when some companies within a tender of opening envelopes compete for the contract. They determine the price according to their estimation of the offer made by their competitors and they do not take into account so much the real costs and the demand. The disadvantage of this method is that it does not provide the desired level of profit.


1.4 Demand oriented pricing The basis of this method is the effort to uncover the relationship between the price and the quantity of sold goods. The attention is focused on the customer - on its approach to the valuation of benefits. The company tries to find out at what price the customers are willing to buy the product and what their reactions to price movements are. This information can be obtained by two ways: by asking consumers and observing consumer behaviour.

2. Market The market is a place where supply and demand meets. The market may be a department store, stock exchange, market place, but also the labour market or the money market. There are three subjects on the market - households, firms, state. 2.1 Supply Nowadays, everyone can choose where he buys goods. Products and services which the buyer chooses from constitute a supply. The law of supply says that with the rising price of goods the supply also increases. The higher the price of services or products is, the more sellers want to sell them on the market, and so the amount of the offered goods is increasing. If the price is low, the manufacturers do not want to sell the goods and the supplied quantity decreases. The supply depends on: 

price



expected demand



quantity of available sources



public interest



weather etc.


The progress of the dependence of the price and the offered quantity is shown in this graph P

S P2

P1

Q

Q1

Q2

The offer is characterized by the supply curve (S), which captures the relationship between the price (P) and the quantity of the offered production (Q), if other factors remain unchanged.

The law applies to the increasing supply - at a higher price, with all other things being equal, there is offered higher amount of production. Higher price motivates manufacturers to produce more; they can buy more resources, produce more goods and achieve higher profit.


Price elasticity of the supplyPrice elasticity of supply indicates „how sensitively “a producer responds to changes in market prices (by changing their offered quantity). It is the proportion between the change in

price, that the customer is willing to pay, and the change of the quantity that the manufacturer is willing to produce. Types of supply 

Individual supply – an offer of one company on the market of one piece of goods



Partial supply – an offer of all companies on the market of one piece of goods, the sum of individual supplies on one market



Aggregate supply – market offer of all subjects on all markets, the sum of all market supplies

2.2 DemandA demand is what we call the interest of a buyer in products or services. A buyer comes on the market to purchase goods at the lowest price. The higher the price of goods is, the less people will be willing to buy the goods. If, for example, the price of a certain kind of food rises, there will be less people who will be willing to pay the higher price. Others will not buy it and they will replace it with other food. The demand depends on 

price



personal preferences



rent of an individual (household)



modern trends, traditions



weather etc.

The dependence between the price and the demanded quantity is shown in this graph:


P

P2= 20

P1= 10

Q

Q2 (4 pieces)

Q1 (8 pieces)

The demand is reflected by the demand curve (D), which captures the relationship between the price (P) of the production and the demanded quantity (Q), if other factors remain unchanged. Here applies the law of falling demand, which says that if the price of goods increases, the demanded quantity of the goods decreases. This Act does not apply to e.g. luxury goods or goods of daily consumption.

Factors influencing the demand: a) type of production - necessary, replaceable b) consumers´ income


c) increasing population d) the share of the product within the consumer´s expenses e) consumer preferences

Price elasticity of the demand Price elasticity expresses "how sensitively" a consumer reacts to changes in market prices. It is the proportion between the price change that the manufacturer wants to get paid for his product and the change of the quantity purchased by the customer. The elasticity of the demand is important for the producers when manipulating with the price. If a minor reduction in the price of one product brings him a significant increase in sales, then the total profit will increase as a result of that price reduction.

2.3 The equilibrium price The seller tries to get the buyer on the market with a more favourable price, quality, speed of delivery and service. Buyer can select the service or product that best suits him. The prices of the products and services are constantly changing, and the size of the offered and demanded quantity is changing too. If at a certain price the supply equates with the demand, the market equilibrium will come to pass. The equilibrium price is thus the price that arises when the supply and the demand becomes equal (point E).


2.4 Inflation Inflation expresses the increase in the price level. Inflation is measured by comparing the prices of selected goods and services of the baseline period to the reporting period. For example, if prices rise over the last year by 7%, it means that the inflation rate is 7%. If the inflation rate rises, then fewer goods can be bought with the same amount of money, thus the value of money decreases significantly. Inflation affects the most the people with fixed incomes, whose value decreases due to inflation. Inflation also negatively affects deposits as at elevated inflation the value of deposits decreases. On the other hand, debtors are those who thanks to the inflation earn. If you borrow e.g. 100 000 CZK with maturity of one year, at an increased price level e.g. for 10% you will actually return 10% less, because the sum owed does not have the same value as in the previous year.

Glossary: Term

Meaning

Price

the value of goods and services expressed with money

Market

the place where supply and demand meet


Dictionary: budget (n) /ˈbʌʤɪt/ calculation unit (n) /ˌkælkjəˈleɪʃᵊn ˈjuːnɪt/ competition (n) /ˌkɒmpəˈtɪʃᵊn/ consumer (n) /kənˈsjuːməʳ/ cost-allocation base (n) /kɒst ˌæləkeɪʃᵊn beɪs/ costs (n) / kɒsts/ demand (n) /dɪˈmɑːnd/ deposit (n) /dɪˈpɒzɪt/ detection (n) /dɪˈtekʃᵊn/ determine (v) /dɪˈtɜːmɪn/ equilibrium (n) /ˌiːkwɪˈlɪbriəm/ inflation (n) /ɪnˈfleɪʃᵊn/ margin (n) /ˈmɑːʤɪn/ offer (n) /ˈɒfəʳ/ overheads (n) /ˈəʊvəhedz/ preliminary (adj) /prɪˈlɪmɪnᵊri/ purchase (v) /ˈpɜːʧəs/ ratio (n) /ˈreɪʃiəʊ/ remain (v) /rɪˈmeɪn/ shortage (n) /ˈʃɔːtɪʤ/ subsequent (adj) /ˈsʌbsɪkwənt/ supply (n) /səˈplaɪ/ surcharge calculation (n) /ˈsɜːʧɑːʤ ˌkælkjəˈleɪʃᵊn/

rozpočet kalkulační jednice konkurence spotřebitel rozvrhová základna náklady poptávka vklad zjištění určit rovnováha inflace přirážka nabídka režijní náklady předchozí nakoupit podíl zůstat manko následný nabídka přirážková kalkulace

Questions:

1) What is the definition of price? 2) What aspects are necessary to be considered when determining the price? 3) What kinds of costs production can you name? 4) How can we divide price calculation according to the terms of time?


5) What is inflation?

Exercises: 1) Complete with the present simple or will. a. Don´t forget to call your mother before you ___________. (leave) b. Go home when the concert ___________ . (finish) c. He __________ until he finds a new job. ( not move) d. If I go to the supermarket, I ___________ some wine.(buy) e. As soon as he __________ I´ll go home. (calm down)

2) Complete with a word or expression from the list.

after

as soon as

before

unless

when

a) __________ we finish the report, we could go for a drink. b) I must write it down _________ I forget it. c) She will be very sad ___________ she hears the bad news. d) We won´t get the tickets for the concert _________ we book them. e) I´ll call you ___________ I get to the hotel.

3) Match the words with the definitions. 1. 2. 3. 4. 5.

budget competition demand margin supply

a. the difference between what a business pays for something and what they sel lit for


b. c. d. e.

a plan of how a person or organisation will spend the money that is available in a particular period of time the amount of goods for sale rivalry between two or more businesses fighting for the same customer or market f. people´s desire to buy or use particular goods and services

4) Make the correct collocations. 1. 2. 3. 4. 5.

calculation cost-allocation direct distribution supplying

a. b. c. d. e.

overheads costs base unit wages


5) Fill in the blanks with the correct form of the verbs. 1) When the manager _____________ ( arrive ), they _______________ ( start ) the meeting. 2) If he _____________ ( reach ) the sales target this year, the company ____________ ( award ) him. 3) We _______________ ( start ) the construction of a shopping center as soon as the government __________( allow ) us to begin. 4) After she __________ ( find ) a good house in Karşıyaka, she_______________ ( buy ) some new furniture. 5) If Alex _______________ ( feel ) better at the weekend, he _______________ ( play ) in the match against Milan. 6) I will have to finish the reports before the manager _______________ ( call ). 7) She _______________( eat ) anything until the doctor_______________( tells ) her to eat. Source: Ege Academy Blog, 2014

Mind map: inflation

demand Price calculation

costs

supply

market

wages

Stock exchange overheads

Competition


Solutions: 1) Complete with the present simple or will. a) Don´t forget to call your mother before you b) Go home when the concert c) He won´t move

leave . (leave)

finishes . (finish)

until he finds a new job. ( not move)

d) If I go to the supermarket, I will buy some wine.(buy) e) As soon as he calms down

I´ll go home. (calm down)

2) Complete with a word or expression from the list.

after

a)

as soon as

before

unless

when

After we finish the report, we could go for a drink.

b) I must write it down

before I forget it.

c) She will be very sad

when

she hears the bad news.

d) We won´t get the tickets for the concert e) I´ll call you

as soon as

I get to the hotel.

3) Match the words with the definitions. 1.b, 2. d, 3. e, 4. a, 5. c

4) Make the correct collocations. 1.d, 2. c, 3. e, 4. b, 5. A

unless

we book them.


5) 1. arrives / will start 2. reaches / will award 3. will start / allows 4. finds / will buy 5. feels / will play 6. calls 7. won’t eat / tells

Bibliography EGE ACADEMY BLOG. Future time clauses (when, before, after, as soon as, until).[online]. [citováno 2014-14-7].Available on WWW: http://www.egeacademy.com/blog/exercises/future-time-clauses-when-before-after-as-soonas-until/ KLÍNSKÝ, P. et al. Finanční gramotnost: obsah a příklady z praxe škol. Praha: Národní ústav odborného vzdělávání, 2008. 96 s. ISBN 978–80-87063–13-2. KRÁL, BOHUMIL. Manažerské účetnictví. Praha: Management Press, 2005. 475 s. ISBN 807261-131-3. file:///C:/Documents%20and%20Settings/home/Local%20Settings/Temporary%20In ternet%20Files/Content.IE5/O74GMOFG/BI-02.prednaska_2012Poptavka_a_nabidka%5B1%5D.ppt#294,4,Poptávka (D = Demand) 28.1.2013

3. PRICE PRICE CALCULATION, DEMAND AND SUPPLY

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