Price Points along a Demand curve

Points A, B, and C in the diagram are price points. By increasing the price beyond a price point (say to a price slightly above price point B), sales volume decreases by an amount more than proportional to the price increase. This decrease in quantity demanded more than offsets the additional revenue from the increased unit price. As a result, total revenue decreases when a firm rises its price beyond a price point. Technically, the price elasticity of demand is low (inelastic) at a price lower than the price point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve). It is a common marketing strategy for a firm to set prices at existing price points.

There are 3 main reasons for the existence of price points:

1. Substitution price points
   • price points occur at the price of a close substitute
   • when an item's price rises above the cost of a close substitute, the quantity demanded drops sharply
2. Customary price points
   • people are used to paying a certain amount for a type of product
   • increasing the price beyond this amount will cause sales to drop dramatically
3. Perceptual price points
   • also referred to as psychological pricing or odd-number pricing
   • raising a price above 99 cents will cause demand to fall disproportionally because $1.00 is perceived to be a significantly higher price

See also

• pricing
• production, costs, and pricing