Management Economics 1: Analysis of Demand and Pricing Policy of Ferrari

This report analyzes the demand and pricing policy of Ferrari, a luxury sports car company. It explains the impact of income, pricing policy, and elasticity of demand on the demand for luxury sports cars. The report also discusses various pricing strategies that businesses can use to attract customers. The report is based on Management Economics 1 course.

MANAGEMENT
ECONOMICS- 1

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Describe the business and its main product or service................................................................1
TASK 2............................................................................................................................................2
Identify the demand and market equilibrium which influenced the demand of their products.. 2
TASK 3 ...........................................................................................................................................4
Indicate the elasticity or more elasticity of demand for the given factors..................................4
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Economics is the study of micro and macro aspects which is affecting the overall growth
of the country and accessing in providing the growth and development to the
economy(Vochozka and et. al., 2018). Management economics is the study which focuses
solving the certain issues of the employees and apply the certain theories so that they can
appropriately understand the business environment. There are is the huge impact of demand and
supply over the products but increase in the prices of product does not make much effect on
luxury goods. Ferrari is the chosen organisation for this report, it is the luxury sports car Italian
company which is founded in 1939 by Enzo Ferrari. This report will analyse the product of the
company and also identify the demand and elasticity of demand in respective of the products.
Moreover, It will explain the pricing policy that will be beneficial for the company.
TASK 1
Describe the business and its main product or service.
Ferrari is the leading company is the auto mobiles industry and they have launched their
first Ferrari badge car in 1947. The headquarter of this company is Maranello, Emilia-
Romangna, Italy. As they are operating their business world-wide with more than 4000
employees in different locations. They are dealing in eye-wear, clothing, high-tech bicycles,
watches and laptops etc.
Chosen product:
The chosen product for company is sports as these are the luxury product of the company
and they are available on customised demand of the customer. The demand for such product is
based on the income level of the consumer as they are having premium pricing policy so that
there is no effect with the change in the price of the sports car.
Explantation of choosing that product:
Ferrari is know for its luxury sports car so this will helps in recognising the elasticity of
demand and demand for these goods due to change in the other factors which is effecting the
demand of the company so that they can have the large customer base. Sports car is majorly
owned by the high income individuals as they are having interest in luxury sports car and want to
show their status, people often buy such expensive sports car.
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TASK 2
Identify the demand and market equilibrium which influenced the demand of their products.
Demand is the desire of the individual that shows the purchasing preferences of the
consumer while buying goods and services and also having willingness to pay the price of the
commodity. As there is no major impact in the change in the other factor. There is inverse
relationship between the price and the demand for the commodity(Vives, Jacob and Payeras,
2018). In relation to Ferrari, sports car are the luxury and there is no change with the change in
income. There are some expectation in the law of demand and this concept is not applicable for
the luxury goods. There is major change with the change in the income of the consumer as the
income tends to increase hence the demand for the luxury goods also increase and if the income
of the consumer fall down then then the demand for the luxury goods also goes down.
Equilibrium is the state when the demand of the particular product is same as the supply
as there is no difference or gap between the demand and supply. AS there is no Change with the
change in the other factors like taste and preference of the customer, income of the consumer,
future expectation, price of substitute goods, price of complements goods and so on. For say,
demands for certain goods decreases as increase in the price of the products. On other hand,
when the price of the commodity increases there is decrease in the demand for that product and
this phases effects the supply and market equilibrium. In context to Ferrari, they are dealing in
luxury goods so there is no major change as change in the price and demand for the sports cars.
As they are working on the demand of the market as they do not do the over production, they
only manufacture the cars according to the demand of the market. There are certain factors which
effects the demand for the goods which are explained as follows:
 Price of substitutes- In case of luxury goods, the law of demand fails ad there is no
change with the change in the income and Luxury goods comes under expectation of law
of demand. There is no substitute goods for sports car as it is totally depends upon the
income level of the consumer which can reflect the increases or decrease in the demand
of the sports car.
 Price of complements- These are goods which is being used with the conjunction of an
another goods or services. These are the goods which are consumed together. Fuel is the
complements for the cars as car can not be operated without the fuel so it directly effects
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the demand of sports car. When the price of the complement good increase then the
demand for the current gods falls down due to increase in the overall maintaining of cars.
On other hand, when the price of complements goods decreases then the price of of
current goods also decreases due to downfall in the overall price of the car.
 Consumer income- It is the compensation of the individual which they get for their some
sort of job or given work. For example, when the individual is having sufficient income
level so they will move to expensive goods or luxury goods. On other hand, when the
income of the consumer decreases it directly effect the overall demand of the goods. In
context to Sports car, these are the luxury good in which they are completely depends on
the income level of the consumer as increase in the demand makes them capable to by the
Ferrari and down fall in their income can not let them buy the car.
 Consumer taste and preference- These are the expectation of the consumer which are
based on the mind set or the perception of the individual according to changes taking
place in the market. When the taste and preferences of the consumer in favour of the
given goods then the demand for such goods rises(Terziev and Arabska, 2017). On other
hand, the taste and the preferences of the consumer are not in favour of the give goods
then the demand of such goods decrease. In context to Sports car, they are fuelled cars
but according to the current perception of the individual, people are getting more concern
for the environmental issues so the demand in such case can be decrease and in case of
individual choice, the demand can be increase irrespective of their prices.
 Demographics- It refers to the number of potential buyer who are loyal to their brand
and having certain perception for the purchasing the particular goods and services. Upper
class people are considered in this category as the people is having buying capacity in
order to purchase the certain products so this could helps the business t have the better
results in their profits. When talking about Sports car, he vast majority of the individual is
owning Ferrari are male and the current age group of the Ferrari owners between 35-55
years and they are self employed. A very high income group trying to highlight their
status by owning Ferrari and interested in Luxury sports car.
It is analysed form the above discussion that there is huge impact with the change in the
income level of the consumer implies in the change in the demand for the luxury cars. The law of
demand fails in such goods as there is no effect with the change in the price of the sports car as it
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is the status symbol which is being pref feed by the upper class society. In context to Ferrari,
They are offering luxury goods in which there is no major impact of price on the demand of the
specific product as demand of the product is completely depends upon the income level of the
consumer.
TASK 3
Indicate the elasticity or more elasticity of demand for the given factors.
Elasticity of demand is refers to the change in the consumption of goods with the change
in the price of commodity due yo change in the various factors that is affecting the demand of the
commodity. It can be written as:
Price Elasticity of Demand= % change in Quantity demand / % change in price
It is basically used by the various economics in which they understand the changeability in the
demand of the product with the change in the price. There are some product in which there is no
effect with the change in their price due to no Change in the other factors and they are being
constant. Certain goods are more elastic which is having major impact with the change in the
price due to sustainable changes in the demand and the supply of the goods and services. When
there is change in the quantity demand of the commodity with the change in the price it will be
known as Elastic. Some of the factors are being explained in respect to the elasticity of demand:
 Substitution effects: It is the aspect in which there is downfall in the sale of the
commodity which the price of the substitute good decrease as customer will move to
cheaper products and the existing firm is changing the hike in the prices of the
commodity(Juutinen, Tolvanen and Koskela, 2020). In context to Ferrari, they are
dealing in luxury goods like sports car and there is not change in the demand of the car
due to increase on decrease in the price of the sports car. These are the type of product
which comes under the exception of the law of demand in which it says that there is the
increase in the demand of the luxury goods with the change in the prices of the
commodity and such goods fit in the exceptions of law of demand.
Sports car are comes under luxury goods as these are goods which is purchased by the
individual for their status and they are having interest in sports car and there is no change in
demand with the change in the price of goods as these cars only purchased with the sufficient
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purchasing power on the pre booking orders. Hence the demand for goods is inelastic as there is
no change in the demand with the change in the price of the cars.
 Income Effects: It is the basic earning of the individual and this is explained as the
change in the demand of the commodity due to change in the income level of the
consumer so hat they can make the better choice or have to cut their expenses. This
totally depends upon how prices of the particular product affects the real income of the
consumer. It is the compensation which is being earned by the individual so that they can
run their life in an easy manner. Every individual is concerned for the enhancement of
their living standards and this is totally based on their income as increase in the income
make them capable to buy quality products and downfall in the income impact their
purchasing power. In context to Sports cars, when there is increase in the income of the
consumer then they will move to buy the luxury and decrease in the income reduce the
interest of the individual for the sports car. They are positively related to each other and
the demand for such goods is inelastic as they belongs to luxury goods in which there is
no change in the price of the car in respects to change in the quantity demand for the
sports car.
Income percentage is the portion of the income which is being spend by the individual on
the purchase of certain goods or services and in relation to the sort cars, they are the expensive
cars which require huge portion of the consumer's income so that they can make the purchase.
These are the status symbols goods which is only purchased by the high profile customers.
What is the pricing policy that business employs and why?
Organisations are working on the different pricing policy as they change their policies
according to the market scenario and do not stick to the particular one. There are some factors
which reflect the change in the pricing policies are change in the demand and the cost of the
particular location, need of the target market or the income level in the current market. These
aspects helps in deciding the pricing policy within the industry. This ensure the higher
profitability within the organisation. Various pricing polices are explained as follows:
 Price discount and allowance: These are the prices which is being offered to the
customer as the reward for the bulk purchasing, early payments, off-season buying etc.
This also incudes the cash discount which is given to the customers at the time of easy
payment or bulk buying(Deme, Mariel and Meyerhoff, 2019).
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 Geographical pricing: These are the pricing policy which is used by the companies
according to the different market locations so that they can serve the large market with
easy approach. They usually cover the local market so that they can reduce the overall
transport cost. This also helps in making the setting the different prices of thr
commodities according to the demand in the particular area so that the companies can
ensure the higher profitability and growth rate.
CONCLUSION
It is concluded from the above report that demand and supply are the two wheels of the
economy which contribute in the enhancement and the development of the nation. This report is
based on the luxury sport car where the law of demands fails and there is no change with the
change in the price of the product. Income of the consumer is the main factor which can impact
the demand and supply of such goods. There are various pricing strategy which is being used by
the business and business must use the price discount so that they can offer the certain type of
vouchers and gifts with the purchase of the given product. This also helps in attracting the large
group of customer by which they can easily target their market.
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REFERENCES
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