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Marginal demand is used to predict how a change in unit price will affect demand for a product. Companies use this to determine if a price change will improve their bottom line or if the current price should stay in place. Understanding marginal demand requires knowledge of supply and demand for the product. Companies regularly assess market conditions and pricing strategies to determine if changes are necessary.
In economics, “marginal demand” is a term used to describe how the demand for a good or service is likely to be affected by a change in the unit price of a product. This approach is often used to project what would likely happen to sales of a given product if the unit price paid by consumers were raised or lowered. Using the marginal demand projection helps companies determine whether making a change one way or the other is likely to result in an improved bottom line or whether the current price should stay in place.
The key to understanding marginal demand is to have a firm understanding of the degree of supply and demand that currently exists for the products under consideration. Assuming general demand is growing, a company that manufactures the products might start speculating about what effect a pricing chance would have on its market share. For example, if the company has relatively few competitors, projecting the price elasticity of demand may reveal that the company has little or nothing to gain by adjusting a price downward. At the same time, revealed marginal demand can also project that making a slight increase in the unit price will not have a negative impact on the number of units that consumers buy, making it possible to increase gross profit without hurting sales numbers.
In a more competitive environment, considering marginal demand can provide valuable clues about how a company that must compete for customers against a relatively wide range of competitors should proceed to maintain current market share and have a chance to increase its share. limited consumer market. Here, projecting the marginal demand if unit prices are lowered by specified increments can help reveal whether the resulting increase in sales would be enough to offset the loss of profit on each unit sold. If the calculation of marginal demand indicates that the volume of purchases made will increase enough to allow the company to earn more revenue from this higher volume, then the price change may be justified and help capture greater market share.
Assessing marginal demand is an ongoing task. As conditions within a consumer market change, companies doing business in these markets must also consider how effective current prices are in attracting customers and keeping demand within an acceptable range. For this reason, companies tend to assess market conditions on a regular basis, consider their current pricing strategies in light of changing circumstances, and then project what would happen if specific pricing changes were implemented.
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