Analyzing Demand and Pricing Strategies: A Management Economics Report

This report provides an analysis of Ferrari, a luxury car manufacturer, from a management economics perspective. It covers key concepts such as demand, market equilibrium, and price elasticity. The report discusses factors influencing demand for Ferrari cars, including the price of substitutes (e.g., Lamborghini, Porsche, Audi), price of complements, consumer income, tastes and preferences, expectations of price, and demographics. It also examines the substitution effect, differentiating between luxury goods and necessities, and explores the elasticity and inelasticity of demand for Ferrari products. The report concludes by discussing the income effect and its impact on Ferrari's pricing policies, highlighting the company's strategy of targeting high-income customers. This document, contributed by a student, is available on Desklib, a platform offering AI-based study tools and a variety of academic resources.

Management Economics.

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Describing the business:..............................................................................................................3
Demand and Market Equilibrium................................................................................................4
Substitution Effects. Luxury vs. Necessity..................................................................................7
Indication of demand in the market:............................................................................................8
Pricing policy which should be adopted by the company:..........................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management economic relates to the branch of economic in which the methods of decision-
making process involve. Therefore, the managerial economics aims to provide the framework to
maximize the profit of the organization. This report includes the information about the GM,
Ferrari an auto mobile company. Information includes the demand and market equilibrium and
price elasticity of demand.
MAIN BODY.
Describing the business:
Ferrari is one of the most successful car manufacturing company, this company
manufacturing super luxury cars and help people to increase their image and lifestyle. Ferrari
belongs to auto mobile market where the competition is very high, this company is still standing
in the market with the brand name and image they have created (Yates, 2019). This Italian car
manufacturing company manufacture sports cars with the aim to increase the lifestyle of people
and its super luxury car designed fulfil the demand of expensive taste customer. When looking at
history of this company, Ferrari was established in 1939 by Enzo Ferrari, the owner have been
looking to enter racing line with their own super fast car. The history of this company clearly say
that, Ferrari was interested more in racing. The with the identification of the demand this
company have been continuously manufacturing super fast sport car with excellence of Italian
design and price that only cane be affordable by good income level group customer. Ferrari own
various world record and the most recent was, the world record for most expensive car in the
world. This company manufacture cars and have wide range of products in car segment. Ferrari
actively contribute in the betterment of the economy, this company is well know for its high
price with attract most of the customer outside Italy. Ferrari do not have any type of car segment
which other car manufacturer have, this company have one segment which is related to sports car
model (Ferrari, 2021). The main product of the company is sport car and service provided by the
company fall under the service offered such as after the sell service and other service. There are
many other car manufacturers in the world but the Ferrari is well-known for its brand name and
image.

Demand and Market Equilibrium
Demand refers the demand of the goods and service in the organization and therefore, this
identifies that how much consumer want the product that organization sell. The total number of
purchase of the product that organization sell indicates towards the demand of theta particular
product (Xing, . and Xiaofeng, 2021).
Market equilibrium indicates the price when the supply of goods matches the demand and
significant the behaviour and dynamic process that identify the outcomes. Basically, this
determines that when market demand and supply are on the same point of the product therefore
this is called equilibrium point.
Price of substitutes: there are a lot of products that similar or substitute of the GM Ferrari such
as; Lamborghini Urraco, Porsche 911 turbos, Audi etc. therefore organization has to be very
concise according to their design and style for the betterment of the organization. The price of
the substitute which is mostly Audi for the company is Higher than the company product price.
As the Audi price is increased in compare to the Ferrari (Garcia-Muiña, and et.al 2019).
Increased in the demand indicates the lower demand therefore this will be beneficial for the
company that their substitute product price are increased and thus, the supply of the different
product responds towards that demand differently. If the price decrease of the product than the
demand also increase that's why Ferrari price decrease and increase in the demand of the product.
There are a lot of competitors of the GM Ferrari in the market but for the betterment of the
company and compete with their competitor they have to learn accordingly.
Price of complements: complements goods or services of the product that organization has
determined the value adding to another. This describes the product that consumer use together
with the product that they sale to the customer. Complements goods are those goods which are
consumer together. The skills of the organization determine the customer base and feasibility to
meet the expectation of the customer. The company give to the complementary products to their
customer such as, welding, assembly, heat treatment etc. the demand of the complementary
goods also indicates towards the demand curve. The demand of the goods increases that describe
the price of the complementary will also increase. Price of the one complementary goods
indicates the negative relation among the other goods of the complementary. Increase in price of
the complementary goods leads towards the fall in demand of the another complementary goods
(Ferrari, and Queirós, 2021).

Consumer income: the main source of the Ferrari company are buy the car and the spare products
that they sale to their customers. The net income through this is approximately 2.5 billion euros.
When consumer income increase they demand more and if the price of the consumer decreases
therefore they demand less or may be no demand. The income determines the economic factor
and the population, employment by which this identifies the income of the consumer and by this

the demand of the product also increase or decrease as the recent scenario COVID-19 therefore,
the income of the consumer decrease and organization has also a major impact because of this.
Consumer has the wider range of availability of the product or services that they want to buy
therefore in this the organization has to influence them towards their spending (ARAUJO, and
FERRARIS, 2021).
Consumer tastes and preferences: consumer taste and preference changes according to the
environment changes and the factor which affect the environment where the consumer of the
organization are. Change in the behaviour of the consumer indicates the value of purchasing and
also the quality of the product that company sell to their consumer. This also indicates that
consumer depends on the factor that determine the factor of the organization. Consumer major
taste and preference changes because of the recent pandemic that occur because this indicates the
price and the consumer income preferences by which the consumer are more aware and less
expense their income on auto mobiles as well. There is positive relation among the amount of the
goods and consumer willingness of the organization by which they able to buy the product from
the organization.
Consumer expectations of price: this factor determines the change in demand and therefore the
demand shift towards the increase in the expectation as the demand increase the increase in the
price of the product of the organization and thereafter the organization has to manage them
accordingly in order to maintain the customer demand and desire. This determines the shift of the
consumer desire towards the purchase power of the consumer of the organization goods and
services. Where income rise and demand of the product will increase identify the affecting factor
of the organization. As the price of the Ferrari increases then the demand of the car was decrease
and when the company decreases the price of the Ferrari other than their competitor there3forer
the demand of the car increases other than their competitors.
Demographics: Italy was the largest market where the Ferrari most sell and therefore the UK and
Germany also has the big market where the product of the organization sells most. The domestic
sales of the cars is approximately the 574 units. The target market of the company indicates the
segmentation and towards the famous personality and celebrity because the car is mainly for the
luxury people who want to buy luxury cars for themselves. The number of cars sales decreases
worldwide because of the pandemic and the sports car of the Ferrari contacted approximately
10% globally. As this graph is the decline of the past 3-4 years of the company. Just because of

the pandemic. Approximately 8300 Ferrari sold every year all over the globe. Majorly this
includes the demand for the brand products and income of the people to buy the product of the
organization. This factor also include the cost and the availabi8lity of the product as consumer
can buy the Ferrari anywhere all over the globe therefore it must be considered that the company
has to manage accordingly.
Substitution Effects. Luxury vs. Necessity.
The Ferrari is considered under the luxury goods which considered towards the targeted people
who can afford the car. Ferrari uses the target market according to their product and mainly the
organization car is for the luxury people who can afford and buy their car. The company made
their brand as a sports luxury cars by which many consumers attract towards them and make
them as value based positioned strategy to analyse the factor and make standard in the market.
Substitution effect: this indicates the decrees tin the sales of the product and consumer switching
there preferences on the other alte4rnative of the company product by which the organization
faces a major impact that's why Ferrari has to manage and implement the changes and the
creative by which they will establish a major market share. If the brand raise their price and with
the quality therefore they do not affect majorly but if the quality is still same then therefore the
organization has to maintain their standard by which they will make a good impact and presence
in the market (Leskinen, and et.al, 2018).
Elasticity vs. inelasticity demand
This indicates the demand in respond to change in the ecno0mic factor for example the price,
income factor like as recent impact occur COVID-19 that's why the decrease in the sale of the
organization in their product and elasticity refers to the demand and shifts of the economic factor
and fluctuating demand of the product that company because of the cangign and diverse
economic environment and availability for the substitute product which include the competitors
of the company's. Price is the most common factor in the economic factor which derives the
elasticity and inelasticity of the company. The demand of the Ferrari indicates the inelastic
because the Ferrari gets too greedy in order to increase their profit and compete with their
competitor. This determines the substantial change and in the quantity and of the demand of the
product by the consumer and factor by which this desire to buy the product has been changes.

Indication of demand in the market:
Income effect: income effect means the business is effected by the income level of the customer
which means a company have to be stable in getting the impact of the income level and the
demand of the customer in the target market (Goldrick-Rab, 2021). The economic state that price
of the product tend to drop when the income level of the people drop, the company need to be
dynamic to handle all the impact from the market. Ferrari have their own customer base which
have good income level which allow them to sell product to a specific customer base in the target
marker. Most of the customer are from dominant income level people which means they have the
ability to purchase any product of the company.
The income level of the customer of Ferrari is much higher because the company sell
high price product, every customer effect the company and it's pricing. The income level of the
people is represented while buying the product of the company, high er income level group also
influence the demand of the products and its price.
The two factor that indicate whether the price is elastic or inelastic such as:
Elastic demand of the market: the company keep their price of the product elastic, this is been
adopted for some of the product. Keeping the price in the range of elastic demand which allow
company to be more stable in the competitive market but it is very clear that Ferrari have to keep
some of the product and its price dynamic as competition is also keeping the price high in the
market to fulfil the elastic demand (Dubois, Jung, and Ordabayeva, , 2021).
Inelastic demand: when the demand in the market remain inelastic which means customer are
ready to purchase the product even if the price is not suitable, this demand of car often happened
with the Ferrari in the market.
Pricing policy which should be adopted by the company:
The pricing policy is one of the most important factor for every business organization,
this help company to set the price of the product accordingly. The Ferrari have skimming pricing
policy which means they set the price of the product high in the introduction period, this
company attract new buyers with their high price (Bergemann, Bonatti and Smolin, 2018.).
Skimming pricing strategy allow Ferrari to reduce the price when the demand gets low, this step
again become very beneficial for the business to attract a better and completely new layer of
customer in the market. Although the price of the product manufactured by the company is very
expensive for normal income level group, this company only target dominant income level group

which have the income ability to purchase the product. The pricing policy recently adopted by
the company is based on the product and the model of the car, even the old model with engine
type is expensive in the target market.
The graph of average pricing of Ferrari:
Passenger-cars (Ferrari)
Source: auto mobile, 2021.
Interpretation: the graph clearly state that Ferrari have even set the price of the product in the
coming year, as this company use skimming pricing policy which make is easy for them to do so.
Ferrari may have skimming pricing policy but it is recommended for the company to use
other pricing policy such as price at premium. It is best of the company to use price at premium
pricing policy because the company can have brand image and name and can have greater
market share as compared to its competitors (Thisse and Ushchev, 2016). Why should Ferrari
adopt price at premium pricing policy because this company is well-known for its super luxury
car designed and use of Italian excellence in the marking of the cars.

Price at premium: price at premium is one of the most successful pricing policy adopted by many
auto mobile giant, this policy state that company can set the price of the product according to
them which means they can even set price higher than its competition. In most of the pricing
policy company try to reduce the price but this allows company to keep the price even high. The
Ferrari can adopt this pricing policy as this company always stay ahead of its competitor in the
market.
CONCLUSION
Summarize report conclude the informatio0nabout the management economic which
considered the GM Ferrari and their business description which considered their substitution
products and market equilibrium by which the pricing policy also included in this elasticity and
inelasticity demand of the company product and therefore by this organization Will get also
help0 and get to now about their substitute products and availability of the targeted market in
order to enhance the organization better.

REFERENCES
Books and Journals
Xing, H. and Xiaofeng, L., 2021. Agricultural labor market equilibrium based on FPGA platform
and IoT communication. Microprocessors and Microsystems, 80, p.103332.
Garcia-Muiña, and et.al 2019. Identifying the equilibrium point between sustainability goals and
circular economy practices in an Industry 4.0 manufacturing context using eco-
design. Social Sciences, 8(8), p.241.
Ferrari, A. and Queirós, F., 2021. Firm Heterogeneity, Market Power and Macroeconomic
Fragility (No. 627). Centre for Studies in Economics and Finance (CSEF), University of
Naples, Italy.
ARAUJO, L. and FERRARIS, L., 2021. Societal Benefit of Multiple Currencies. Journal of
Money, Credit and Banking.
Leskinen, and et.al, 2018. Substitution effects of wood-based products in climate change
mitigation.
Dubois, D., Jung, S. and Ordabayeva, N., 2021. The psychology of luxury consumption. Current
Opinion in Psychology, 39, pp.82-87.
Bergemann, D., Bonatti, A. and Smolin, A., 2018. The design and price of
information. American economic review, 108(1), pp.1-48.
Goldrick-Rab, S., 2021. Paying the price. University of Chicago Press.
Thisse, J.F. and Ushchev, P., 2016. When can a demand system be described by a multinomial
logit with income effect?. Higher School of Economics Research Paper No. WP
BRP, 139.
Yates, B., 2019. Enzo Ferrari: The Man and the Machine. Penguin UK.
Online:
Ferrari, 2021. Ferrari S.P.A., [Online]. Available Through., <www.ferrari.com>
Auto mobile, 2021. Passenger car (Ferrari). [Online] Available Through.,
<https://www.statista.com/outlook/mmo/passenger-cars/ferrari/worldwide>