Price Points

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image:Price_points3a.pngPrice points are prices at which demand is relatively high. In introductory microeconomics, a demand curve is downward sloping to the right and either linear or gently convex to the origin. The first is usually true, but the second is only piecewise true, as price surveys indicate that demand for a product is not a linear function of its price and not even a smooth function. Demand curves look more like a series of waves than a straight line.

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 raises 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:

Consumer theory#Price effect as sum of substitution and income effects 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

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

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