Question

Which products in each pair would tend to have higher markups in a supermarket? a. Cigarettes versus tomatoes b. Potatoes versus orange juice

Short answer

Cigarettes tend to have a higher markup than tomatoes due to their longer shelf life and brand exclusivity. Branded orange juice typically has a higher markup than potatoes, owing to value addition and branding.

Step-by-step solution

Understanding Markup

Markup is the amount added to the cost of a product to cover expenses and generate profit. Factors influencing markup include perishability, supply and demand, brand exclusivity, and the length of time items can be stored.

Assessing Cigarettes Versus Tomatoes

Cigarettes have a long shelf life, are a branded item, have stable demand, and are less perishable. Tomatoes are perishable with a short shelf life, leading to potential waste. Cigarettes are typically marked up higher than fresh produce such as tomatoes.

Assessing Potatoes Versus Orange Juice

Potatoes, while perishable, have a longer shelf life than some produce and a relatively stable demand. Orange juice can either be sold as a fresh product with a shorter shelf life or as a branded, value-added product. Branded orange juice, especially if it is fortified, tends to have a higher markup than potatoes.

Key concepts

Perishability and Markup

When discussing the relationship between perishability and markup, we're essentially looking at how the lifespan of a product affects its pricing above cost. Products like tomatoes are highly perishable; they spoil quickly and must be sold within a narrow timeframe to remain fresh. This pressure on retailers can lead to a lower markup because the cost of potential waste is high.

On the other hand, non-perishable items, such as cigarettes, come with less urgency to sell and can be stored for long durations without losing quality or value. This allows retailers to apply a higher markup, as the risks associated with inventory obsolescence are significantly reduced. In short, the less perishable an item is, the higher the potential markup, as these products provide a buffer against the losses tied to unsold perishable goods.

Supply and Demand

Supply and demand are fundamental economic forces that play a pivotal role in determining the price of goods. Products with a high and consistent demand, like cigarettes, allow retailers to mark up their prices due to consumer willingness to pay more for these goods. The demand for cigarettes is relatively inelastic – changes in price have a minimal effect on the quantity demanded.

In contrast, when the supply of a product like potatoes increases drastically, perhaps due to a bumper crop, the price tends to decrease unless there’s a corresponding rise in demand. If the market is saturated, the product's markup will likely be lower to encourage quick sales and prevent waste. Highlighting how changes in supply and demand can impact pricing, retailers strategically adjust markups to manage profit margins while ensuring competitiveness.

Brand Exclusivity

Brand exclusivity can substantially influence the markup of a product. Exclusive or premium brands that have built a strong consumer loyalty can command higher prices because their customers see an added value in the brand itself – it's not just about the product, but the brand experience. For instance, branded orange juice, which may be fortified with additional vitamins, has a higher perceived value compared to ordinary orange juice or a product like potatoes, which typically have no branded variants.

Consumers often perceive branded products as superior in quality and are willing to pay a premium for them, enabling retailers to increase markups. This exclusivity and perceived value allow for larger margins compared to generic or unbranded goods, which compete more on price than on brand prestige or perceived quality.