1. What is pricing policy?

What are the internal and external factors of

the policy?

Pricing policy is a standard procedure used by management of a firm to set

wholesale and retail prices for its products or services taking into account various
internal and external factors and its own business objective.
In this era of increasing globalization, the costs of labor, transportation, and
materials constantly fluctuate. This presents a problem because it creates new
complexities and encourages new competition. This also presents an opportunity
because those complexities challenge organizations to re-evaluate its pricing
process regularly. Doing this helps organizations find ways to reduce costs.
Globalization also requires an understanding of general economic conditions, varied
government economic and taxation policies, and new and potential competitors—all
of which create pressure that influences pricing. Not surprisingly, companies have
turned to levers more directly within their control—such as reducing costs and
improving process management—as sources of profit growth. If done effectively,
this can keep prices relatively stabilized even while margins fluctuate greatly.
Price stability, however, may not best serve your bottom line. Pricing policy can be
a strategic opportunity if designed accordingly—for example, by re-engineering the
supply chain and production (or service delivery) processes simultaneously. Re-
engineering is a method of finding more efficient processes within a business to
reduce costs while improving the quality of its products and services. It may result
in downsizing and outsourcing as economies and new resources become apparent.
However, strategic pricing can also be a tool to increase profits. Companies that re-
engineer their price positions unleash significant profit potential.

Internal factors
a) Cost of production
b) Objectives of the firm
c) Quality of the product and its characteristics
d) Wage policy and sales turnover
e) Utilisation pattern of the product
f) Extent of uniqueness of the product and product differentiation practiced by
the company
g) Composition of the product and life of the firm.
h) Advertising and sales promotion policies
i) Policy towards percentage of profits and dividend distribution.
j) Scale of production
k) Efficient management of resources

External factors
(a) Market competition
(b) Market size
(c) Market trends
(d) Market Share
(e) Currency exchange rate
(f) Demand, supply and their determinants
(g) Elasticity of demand and supply

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 (h) Reputation of a firm in the market
(i) Purchasing power of the buyers
(j) Bargaining power of customers
(k) Availability of substitutes and compliments
(l) Buyers behavior in respect of the product.
(m) Governments policy in regard to taxation, controls, foreign capital e.t.c
(n) Technology
(o) Competitors pricing policy
(p) Social consideration

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 2. Mention three crucial objectives of price policies

(i) Profit maximization in the short term

The primary objective of the firm is to maximize its profits. Pricing policy as
an instrument to achieve this objective should be formulated in such a way as
to maximize the sales revenue and profit. Maximum profit refers to the
highest possible of profit. In the short run, a firm not only should be able to
recover its total costs, but also should get excess revenue over costs. This
will build the morale of the firm and instill the spirit of confidence in its
operations. It may follow skimming price policy, i.e., charging a very high
price when the product is launched to cater to the needs of only a few
sections of people. It may exploit wide opportunities in the beginning. But it
may prove fatal in the long run. It may lose its customers and business in the
market. Alternatively, it may adopt penetration pricing policy i.e., charging a
relatively lower price in the latter stages in the long run so as to attract more
customers and capture the market.

(ii) Profit optimization in the long run

The traditional profit maximization hypothesis may not prove beneficial in the
long run. With the sole motive of profit making a firm may resort to several
kinds of unethical practices like charging exorbitant prices, follow Monopoly
Trade Practices (MTP), Restrictive Trade Practices (RTP) and Unfair Trade
Practices (UTP) etc. This may lead to opposition from the people. In order to
over come these evils, a firm instead of profit maximization, aims at profit
optimization. Optimum profit refers to the most ideal or desirable level of
profit.Hence, earning the most reasonable or optimum profit has become a
part and parcel of a sound pricing policy of a firm in recent years.

(iii) Price Stabilization

Price stabilization over a period of time is another objective. The prices as far
as possible should not fluctuate too often. Price instability creates uncertain
atmosphere in business circles. Sales plan becomes difficult under such
circumstances. Hence, price stability is one of the pre requisite conditions for
steady and persistent growth of a firm. A stable price policy only can win the
confidence of customers and may add to the good will of the concern. It
builds up the reputation and image of the firm.

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 3. Mention the bases of price discrimination.
(a)Personal Differences: This is where sellers charge different prices for the
same commodity because of personal differences arising out of ignorance
and irrationality of consumers, preferences, prejudices and needs.
(b)Place: Markets may be divided on the basis of entry barriers, e.g. price of
goods will be high in the place where taxes are imposed. Price will be low in
the place where there are no taxes or low taxes.
(c) Different uses of the same commodity: When a particular commodity or
service is meant for different purposes, different rates may be charged
depending upon the nature of consumption. For e.g. different rates may be
charged for the consumption of electricity for lighting, heating and productive
purposes in domestic, industry and agriculture.
(d)Time: Special concessions may be given during festival seasons or on
important occasions.
(e)Distance: An example of this is where railway companies and other
transporters charge lower rates per km if the distance is long and higher
rates if the distance is short.
(f) Special orders: When the goods are sold to customers who made orders it
is easy to charge different prices to different customers. In this case,
particular consumer will not know the price charged by the firm for other
consumers.
(g)Nature of the product: Prices charged also depends on nature of products
e.g., railway department charge higher prices for carrying coal and luxuries
and less prices for cotton, necessaries of life, it costs much higher
transporting glass or fuel in Uganda than bananas for the same distance etc.
(h)Quantity of purchase: When customers buy large quantities, discount will
be allowed by the sellers. When small quantities are purchased, discount may
not be offered.
(i) Geographical area: Business enterprises may charge different prices at the
national and international markets. For example, dumping – charging lower
price in the competitive foreign market and higher price in protected home
market.
(j) Discrimination on the basis of income and wealth: For e.g., a doctor
may charge higher fees for rich patients and lower fees for poor patients.
(k)Special classification of consumers: For e.g., Transport authorities such
as Railway and Roadways show concessions to students and daily travelers.
Different charges for 1st class and 2nd class traveling, ordinary coach and air
conditioned coaches, special rooms and ordinary rooms in hotels, etc.
(l) Age: Cinema houses in rural and urban areas and transport authorities
charge different rates for adults and children.
(m) Preference or brands: Certain goods will be sold under different
brand names or trade marks in order to attract customers. Different brands
will be sold at different prices even though there is not much difference in
terms of costs.
(n)Social or Professional status of the buyer: A seller may charge a higher
price for those customers who occupy higher positions and have higher social
status and fewer prices to common man on the street.

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 (o)Convenience of the buyer: If a customer is in hurry, higher price would be
charged. Otherwise normal price would be charged.
(p)Discrimination on the basis of sex: In selling certain goods, producers
may discriminate between male and female buyers by charging low prices to
females. If price differences are minor, customers do not bother about such
discrimination.
(q)Peak season and off peak season services: Hotel and transport
authorities charge different rates during peak season and off peak seasons.

4. What do you mean by the fiscal policy? What are the instruments of fiscal
policy? Briefly comment on India’s fiscal policy.

Fiscal policy is a package of economic measures of the government regarding its

public expenditure, public revenue, public debt or public borrowings. It affects
aggregate output, employment, saving, investment e.t.c. The term “fisc” in English
language means “treasury”, and as such, policy related to treasury or government
exchequer is known as fiscal policy.
In the words of Ursula Hicks, “Fiscal policy is concerned with the manner in which
all the different elements of public finance, while still primarily concerned with
carrying out their own duties (as the first duty of a tax is to raise revenue) may
collectively be geared to forward the aims of the economic policy”.

The instruments of fiscal policy are as follows:

(a)Public Revenue: It refers to the income or receipts of public authorities. It is

classified into two parts – Tax-revenue and non-tax revenue. Taxes are the
main source of revenue to a government. There are two types of taxes. They
are direct taxes like personal and corporate income tax, property tax and
expenditure tax etc and indirect taxes like customs duties, excise duties,
sales tax now called as VAT etc. Administrative revenues are the bi-products
of administrate functions of the government. They include fees, license fees,
price of public goods and services, fines, escheats, special assessment etc.
(b)Public expenditure policy: It refers to the expenditure incurred by the
public authorities like central, state and local governments. It is of two kinds,
developments or plan expenditure and non-developments or non-plan
expenditure. Plan expenditure include income – generating projects like
development of basic industries, generation of electricity, developments of
transport and communications, construction of dams etc. Non-plan
expenditure includes defense expenditure, subsidies, interest payments and
debt-servicing changes etc.
(c) Public debt or public borrowing policy: All loans taken by the
government constitutes public debt. It refers to the borrowings made by the
government to meet the ever-rising expenditure. It is of two types, internal
borrowings and external borrowings.
(d)Deficit financing: It is an extraordinary technique of financing the deficits in
the budgets. It implies printing of fresh and new currency notes by the
government by running down the cash balances with the central bank. The

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 amount of new money printed by the government depends on the absorption
capacity of the economy.
(e)Built in stabilizers or automatic stabilizers (BIS): The automatic or built
in stabilizers imply, automatic changes in tax collections and transfer
payments or public expenditure programmers so that it may reduce
destabilizing effect on aggregate effective demand. When income expands,
automatic increase in taxes or reduction in transfer payments or government
expenditures will tend to moderate the rise in income. On the contrary, when
the income declines, tax falls automatically and transfers and government
expenditure will rise and thus built in stabilizers cushions the fall in income.

India’s Fiscal Policy Overview:

1. The Union Budget 2008-09 was presented in the backdrop of impressive growth
in the Indian economy which clocked about 9 per cent of average growth in the last
four years. This striking performance coupled with significant improvement in fiscal
indicators, during the Fiscal Responsibility and Budget Management (FRBM) Act,
2003 regime definitely put the country on a higher growth trajectory inspiring
confidence in the medium to long term prospects of the economy. The process of
fiscal consolidation during these years has resulted in improvement in fiscal deficit
from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in 2007-08. During the
same period, revenue deficit has declined from 4.4 per cent to 1.1 per cent of GDP.
In tune with the philosophy of equitable growth, the process of fiscal consolidation
was taken forward without constricting the much-required social sector and
infrastructure related expenditure. This improvement in the state of public finances
was achieved through higher revenue buoyancy, driven by efficient tax
administration and improved compliance which is evident from increase in the tax
to GDP ratio from 8.8 per cent in 2002-03 to 12.5 per cent in 2007-08.

2. Riding on the path of fiscal consolidation, the Union Budget 2008-09 was
presented with fiscal deficit estimated at 2.5 per cent of GDP and revenue deficit at
1 per cent of GDP.
However after the presentation of the Union Budget in February 2008, the world
economy was hit by three unprecedented crises -- first, the petroleum price rise;
second, rise in prices of other commodities; and third, the breakdown of the
financial system.
The combined effects of these crises of these orders are bound to affect emerging
market economies and India was no exception. The first two crises resulted in
serious inflationary pressure in the first half of 2008-09. The focus of the monetary
as well as fiscal policy shifted from fuelling growth to containing inflation, which had
reached 12.9 per cent in August, 2008.
Series of fiscal measures both on tax revenue and expenditure side were
undertaken with the objective of easing supply side constraints. These measures
were supplemented by monetary initiatives through policy rate changes by the
Reserve Bank of India, and contributed to the softening of domestic prices.
Headline inflation fell to 4.39 per cent in January, 2009. However, the fiscal
measures undertaken through tax concessions and increased expenditure on food,
fertilizer and petroleum subsidies along with increased wage bill for implementing
the Sixth Central Pay Commission recommendations significantly altered the deficit
position of the Government.

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3. The global financial crisis in the second half of the financial year which heralded
recessionary trends the world over also impacted the Indian economy causing the
focus of fiscal policy to be shifted to providing growth stimulus.
The moderation in growth of the economy and the impact of the fiscal measures
taken to stimulate growth can be seen reflected in the estimates for gross tax
revenue which stand reduced from Rs 6,87,715 crore in B.E.2008-09 to Rs 6,27,949
crore in R.E.2008-09.
Additional budgetary resources of Rs.1, 50,320 crore provided as part of stimulus
package and various committed liabilities of Government including rising subsidy
requirement, provision under NREGS, implementation of Central Sixth Pay
Commission recommendations and Agriculture Debt Waiver and Debt Relief Scheme
for Farmers contributed to the higher fiscal deficit of 6 per cent of GDP in RE 2008-
09 as compared to 2.5 per cent of GDP in B.E.2008-09.

4. The Country is facing difficult economic situation, the cause of which is not
emanating from within its boundaries. However, left unattended, the impact of this
crisis is going to affect us in medium to long term.
The Government had two policy options before it. In view of falling buoyancy in tax
receipts, the Government could have taken a decision to cut expenditure and
thereby live within the estimated deficit for the year.
The second option was to increase public expenditure, even with reduced receipts,
to stimulate economy by creating demand and maintain the growth trajectory which
the country was witnessing in the recent past.
The Government took the second option of adopting fiscal measures to increase
public expenditure to boost demand and increase investment in infrastructure
sector.
Ensuring revival of the higher growth of the economy will restore revenue buoyancy
in medium term and afford the required fiscal space to revert to the path of fiscal
consolidation.

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 5. Comment on the consequences of environmental degradation on the
economy of a community.

There has been very fast and quick economic growth in many countries of the
world. There is a visible change in the pattern of economic growth. In the name of
quick economic development in a very short period of time, there is fast depletion
of all kinds of resources and many types of resources may be exhausted in the near
future. There has been excessive and over-utilization of many resources.
Degradation and destruction of resource-base is unpardonable. They have adverse
effects on health, efficiency and quality of life of the people. Hence, there is cry for
environmental protection in recent years. Unless concrete measures are taken in
right time, the man kind may have to pay a heavy price in the near future. In this
background, today economists are talking about the concept of sustainable
economic development.
Sustainable economic development seeks to meet the needs and
aspirations of the present without compromising the ability of future
generations to meet their own needs. It is felt that sustainable development
can be achieved only when the environment is protected, conserved, saved and
improved consciously by the people in a country. The process of development will
become sustainable only when the stocks of various sources of resources, their
quantities represent a common heritage for all generations. Hence, all out efforts
are to be made to augment these resources in several ways and means.
While estimating the national income of a country, under the new system of
accounting, one has to take into account of the total physical volume of resources
and their monetary value. The total depreciation charges include the wear and tear
of capital assets, depletion of natural resources, various kinds of losses arising out
of capital assets, depletion of natural resources, various kinds of losses arising out
of environmental decay and degradation etc.

Environmental damages may be in the following categories they are as

follows:
1. Water Pollution
The water quality is continuously deteriorating due to contamination from the
industrial waste, by throwing out chemical waste and heavy metal in the river. It is
difficult to remove the pollutants from the water to make it good for drinking
purpose. The capacity of the water to preserve the aquatic life is becoming more
and more difficult. The underground water is also getting affected by the industrial
waste, as they sometimes get discharged directly into underground water.

2. Air Pollution
Air pollution can be contributed to the three man made sources, industrial
production, vehicles and the energy. Human suffering increases due to the air
pollution. Respiratory disorders and cancers are due to inhalation of polluted air.
The vehicle increases the sulpur dioxide concentration in the air creating breathing
problems for the children and affects their neurological developments.

3. Deforestation

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 Forests are the most important sources that protect the environment. They
protect soil erosion and regulate the ecological balance of the nature. They
affect the nature and the climatic condition of the region. The blind increase in
the industrial growth is leading to cutting down of many forests leading to many
serious problems for the human beings.

4. Soil Pollution
5. Loss of Biodiversity
6. Solid and Hazardous wastes

6. Write short notes on the following:

a) Philips curve

In 1958 Professor A.W. Phillips wrote a paper The Relationship between the rate of
growth
of money wages and unemployment in the United Kingdom from 1861 – 1957 which
was published in the quarterly journal Economica.
Philips in his empirical study found that when unemployment was high, the rate of
increase in money wage rates was high. Philips calls it as the tradeoff between
unemployment and money wages.

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In the figure the horizontal axis represents the rate of unemployment and the
vertical axis represents the rate of growth of money wages. In the figure, PC
represents the Philips curve; PC is sloping downwards and is convex to the origin of
the two axes and cuts the horizontal axis. The convexity of diagonal shows that
money wages fall with increase in the rate of unemployment or conversely money
wages rise with decrease in the rate of unemployment.
This inverse relationship between money wage rates and unemployment is based
on the nature of business activity. During the period of rising business activity wage
rate is high and the rate of unemployment is low and during periods of declining
business activity wage rate is low and the rate of unemployment is high

B) Stagflation
Stagflation is a portmanteau term in macro economics used to describe a period
with a high rate of inflation combined with unemployment and economic recession.
Inflationary gap occurs when aggregate demand exceeds the available supply and
deflationary gap occurs when aggregate demand is less than the aggregate supply.
These are two opposite situations. For instance, when inflation goes unchecked for
some time, and prices reach very high level, aggregate demand contracts and a
slump follows. Private investment is discouraged. Inflationary and deflationary
pressures exist simultaneously. The existence of an economic recession at the
height of inflation is called “stagflation”.

Stagnation + Inflation = Stagflation

Stagnation = Slow or no growth.
Inflation = Rises in price

Stagflation is an economic trend in which inflation and unemployment rise while

general growth of the economy is slow. It can be difficult to correct stagflation,
because focusing on one aspect of the problem can exacerbate other aspects. Many
governments try to avoid stagflation through fiscal policy, by promoting even and
healthy growth and attempting to prevent inflation. If stagflation continues long
enough, it will trigger an economic recession and an ultimate self-correction.
Stagflation is when the economy experiences slow GDP growth (stagnation) with
high inflation and high level of unemployment. This occurred in the 1970's in many
countries. When the economy is working normally, slow economic growth reduces
demand, which keeps prices low, preventing inflation. Stagflation can only occur
when fiscal or monetary policy sustains high prices, and inflation, despite slow
growth. Stabilization policies to control stagflation.
1. The money supply should be tightened to check inflation.
2. We can control inflationary wage and price increases with direct controls.
Government can limit increases by law or constrain them through tax policies.
3. Protect people against the effects of inflation. All wages, including the minimum
wage, could be increased automatically when the Consumer Price Index increases.
Government bonds could pay a fixed real interest rate by adjusting the actual
interest rate for inflation.
Stagflation is difficult to control without government controls. Therefore, political
will is necessary for formulating the measures to stop stagflation.

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