Final answer:
To recommend keeping the price of a good unchanged, one must consider market competitiveness, price elasticity, and the presence of substitutes. In a competitive market with an identical product, a price change may drive customers to competitors, resulting in lost sales. High price elasticity or the ability for consumers to substitute goods further supports maintaining current prices.
Step-by-step explanation:
When considering whether to keep the price of a good unchanged, several factors come into play, particularly in a highly competitive market scenario. In the case where a product is identical to those offered by other firms in the market, it is imperative to maintain a competitive pricing strategy. Increasing your price could lead consumers to switch to a competitor's product, resulting in a total loss of sales.
Additionally, price elasticity of demand should be considered. A product with high elasticity (greater than 1) means consumers are sensitive to price changes, and a price increase could lead to a proportionately larger decrease in quantity demanded. Conversely, a product with low elasticity (less than 1) would not see as drastic a change in quantity demanded with a price change. Also, in an environment with inflation and possible salary growth commensurate with the inflation rate, the standard of living may seem constant although the cost of living could actually be misrepresented due to substitution bias and quality/new goods bias. A fixed basket of goods may not reflect true consumer cost of living as consumers have the ability to substitute for other goods when prices rise.
Therefore, if a product has high market competition, significant substitutability, or is highly elastic, it would be recommended to keep the price unchanged to maintain competitive advantage and avoid losing market share. Only in a situation where there are barriers to competition, unique product differentiators, or inelastic demand, might a company consider raising prices.