Joint Product Pricing: A Complex Technique of Microeconomics Marketing

Microeconomics is all about the behavioural study of individuals, households and firms in the decision-making and allocation of resources. The study of Microeconomics deals with the choices that people make and the factors that influence their choices. The decision that people make affects the production of goods by determining and analysing the price, supply and demand. Microeconomics definition states that it is a goal of investigating the mechanisms of the market that establishes relative prices among goods and services and allocating limited resources among alternative uses.

Microeconomics Definition- everything you need to know

Microeconomics marketing stands in contrast to macroeconomics. It involves "the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment with national policies relating to these issues". It also involves the effects of economic policies on microeconomic behaviour.

There are three basic concepts of microeconomics. Like any other branch of marketing, Microeconomics also has various key areas. Read on to know in details.

Demand, supply and equilibrium:

Being a student of marketing, you must be aware of the demand, supply and equilibrium trio. It is an economic model of a perfect price determination in a competitive market. It can be regarded as the process of a quantity of a commodity that producers wish to sell and the quantity that the consumers aim to buy. The price of the commodity is determined by the interaction of supply and demand in a market. The amount of goods available are the supply and the amount of people wanted to buy the commodity is the demand.

Supply and demand equilibrium is the process of interaction between consumers and producers in a competitive market for determining the price. Market forces drop the price if the quantity supplied exceeds the quantity demanded. On the other hand, prices rise if the quantity demanded exceeds the quantity supplied.

Measurement of elasticity:

Microeconomics also deals with the measurement of how responsive an economic variable is to a change in another variable. The process of measurement is known as elasticity. To put in a simple explanation, “elasticity refers to the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes”.

Consumer demand theory:

Consumer demand theory of demand curve is an essential part of microeconomics. The theory relates preferences for the consumption of both goods and services to the consumption expenditure. Microeconomics is the core study of the link between personal preferences, consumption expenditure and the demand curve.

Techniques of Microeconomics Marketing

Marketing techniques of Microeconomics deals with multiple theories. Some of the branches are discussed below. Keep reading for relevant insights.

What Is the Nature of Microeconomics & Its Effect on a Business?

Marketing techniques related to microeconomics include demand supply, elasticity and consumer demand theory. Various theories of Microeconomics are listed below:

Theory of production:

In economics, the theory of production is an essential part of a business. It is an effort to explain the principles by which a business firm decides how many commodities to produce based on the demand curve. It also includes the amount of labour, raw material, fixed capital good, etc. The theory of production deals with the input and output of a business. In the theory of production, the role of microeconomics is to find out the balance between the prices of commodities and productive factors. Microeconomics marketing is a big tree where you would find various branches.

Cost of production:

Microeconomics marketing techniques also rely on the cost of production theory of value. The cost of production consists of the price of an object that is further determined by the sum of the resource cost required for making it. The cost is influenced by different factors starting from labour, capital land, technology, fixed capital, and circulating capital.

Opportunity cost:

The opportunity cost of any activity is the value of the next-best alternative thing you may have done instead. You choose the better one by sacrificing something that you consider dispensable. You cannot go for two opportunities at the same time.

Importance of Microeconomics in a Business

Microeconomics plays a vital role in the decision-making process of a business. According to the results that microeconomics marketing brings in to the industry, the managers come up with new strategies and decision-making process. It helps to introduce new plans regarding pricing and production policies. Following are the points that represent the importance of microeconomics in a business.

Optimal resource utilisation:

Microeconomics helps the businesspersons to determine the amount of resources that should be allocated in the production of various goods and services. It further helps to determine what to produce, how much to produce, and for whom to produce.

Demand analysis:

Microeconomics helps the business decision makers to find out the demand for the product. The ratio of consumption of the product helps to decide on the production process. Moreover, a proper demand analysis also helps to understand the amount of changes needed in the product and if the pricing policy requires changes.

Cost analysis:

This is the most critical genre of microeconomics. Various existing theories explain various conditions of cost in microeconomics. A business has to deal with different types of cost analysis starting from fixed price, variable cost to average cost. There are two other analysing factors that are marginal cost and short and long-run cost. These costing variations help the manager to compare the cost of production that evolves in different periods.

Examples of Joint Product Pricing

Joint product pricing is an important part of microeconomics. This is the struggle that a business faces while fixing the prices for joint products. Pricing for joint products is more complicated than single products.

The company has to undertake the multiple products pricing policies to fix the price for a joint product. The most common example of joint product pricing is the production of butter, cheese, and cream for milk.

The point at which a joint process yields separate identifiable joint products is called the split-off point. Costs are allocated to joint products at split-off point using one of several methods including:

Physical measurement method: allocation of joint costs based on the quantity of each joint product manufactured.
Net realisable value method: allocation of joint costs based on sale price less than any additional expenses to be incurred before the sale.

Joint product pricing is done after considering several things. The process is crucial for determining the profit obtained from the products.

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