Be it a Multi-national corporation making $ 50,000 billion income annually or a non-governmental organization chasing funds to help underprivileged members from various strata of the society, marketing is an important tool to approach the target clientele.
Businesses rely on marketing function to understand the climate of the market segments and satisfy the customers’ needs. Marketing managers need to comprehend the demand and pricing aspects of the commodity to deliver utility to their customers. That’s when economics comes into the picture.
Microeconomics is a branch of economics that deals with economic choices individuals and firms make. It analyzes the market mechanisms that establish relative prices among goods and services and allocate scarce resources among alternative uses. It plays a momentous role in assisting business firms and business decision-makers. There is a special branch of economics called ‘Managerial Economics’ that uses microeconomic tools to solve real-world business problems. As of now, let’s isolate our focus on the marketing function of the business.
Demand analysis helps marketing managers to forecast the demand for their goods before its launch in the market. Quantity demanded of a good is typically determined by the price of the good, consumers’ income, price of substitutes and complements, taste and preferences and future expectations of consumers. The market forces of demand and supply determine one of the four P’s of marketing, ‘Price’. Microeconomics also throws light on different market structures and how the pricing decision of firms varies accordingly.
Founder of Low-cost airline EasyJet and the EasyGroup, Sir Stelios Haji-Ioannou attributes his success to sound financial background and the lecture on the elasticity of demand he attended whilst pursuing economics at London School of Economics. The elasticity of demand plays a fascinating role in aiding marketing managers to come up with effective pricing strategies. It is defined as the change in the behaviour of buyers in response to a change in the price of the good, income, price of substitute and complementary goods. If the demand for your products is highly elastic, cutting prices should lead to an increase in revenue. Increasing prices will lead to a fall in revenue. If demand is price inelastic, then you can increase your profits by increasing your price.
Economists traditionally employ utility to represent value. Utility theory based on rational choices usually assumes that consumers will strive to maximize utility. The economic utility of a good or service is important to understand because it will directly influence the demand, and therefore price, of that good or service.
The very objective of marketing is to create value. Marketing experts should scrupulously position their products at a higher utility level than their competitors. Prior to the introduction of the Apple iPad in 2010, consumers had two polar choices. Either they could choose to schlep bulky laptops that provided comprehensive computer applications or carry smartphones that had small screens and offered a limited number of applications. The iPad was relatively portable, had a large screen and offered a variety of applications. The tablet computer was an immediate success. Similarly, Subway changed the notion of fast-food chains by offering healthy and fresh sandwiches and salads to their consumers. Clearly, the products were well-positioned in both cases.
The assumption of rationality of individuals in microeconomics often doesn’t hold in the real world. Consumers are emotional, impulsive and susceptible to change in societal ideologies. Marketing fills this chasm by drawing insights from psychology, anthropology, and sociology. Despite the lack of realism, microeconomic tools and models help managers to analyze the basic features of the market before rolling out their products.
As mentioned before, microeconomic tools are used to address other business problems too. A little sneak into the field of managerial economics may interest you.