Final answer:
To determine what price Colgate should charge to maintain the same profit, one must consider cost factors and the relationship between price, demand, and profitability, along with the impact of supply and demand changes and elasticity on market dynamics and consumer behavior.
Step-by-step explanation:
Understanding Product Pricing and Profit
When tasked with determining the price to charge for a product to maintain a consistent profit level, it is essential to consider all cost factors and the relationship between price, demand, and profitability.
For instance, imagine that last year a company like Colgate sold a product at a specific price point, and they wish to keep their profit steady despite demand fluctuations. In such a scenario, the business would need to adjust the selling price so that the revenue, minus all incurred costs, equals their previous year's profit.
Moreover, when evaluating market scenarios—like a new competitor entering the space—the dynamics of supply and demand should be carefully analyzed. An increase in the total supply of a product, due to an incumbent producing 6,000 units and a new firm producing 4,000 units, would typically drive the market price down, affecting potential profits. Similarly, elasticity of demand plays a crucial role when setting prices for products like pharmaceuticals, as it influences consumer response to price changes.
The concept of income elasticity of demand helps classify goods as normal or inferior, depending on how demand varies with changes in income levels. For instance, if bread is observed to have negative income elasticity, meaning people buy less as their income goes up, it would be classified as an inferior good.