Accounting

7 Pages 1701 Words

service from anothers.

In a perfectly competitive market the price of a particular

service is established solely by the interaction of market demand and

supply. (Thompson p.277) When market demand for accounting services

increases the resulting demand shifts right causing pri ces to increase

returning the market back to equilibrium. However when supply increases,

such is the theoretical effect of adding advertisement to public

accounting practice, the supply curve shifts right causing prices to fall.

The model of monopolistic competition is also price sensitive,

however only at the firm level. For example, the CPA firm of XYZ has an

established clientele base and uses referrals as its sole means of growth.

They increase prices only as their cost o f providing the service

increases and therefore are able to maintain their client base. In this

example a gently downsloping demand curve exists (Thompson p.304) causing

only drastic changes in pricing to send their client base shopping for a

new firm. The result is XYZ can continue to grow by practicing fair

pricing and providing a reputable service. Cut rate pricing only

marginally effects their client base because there is little means to make

their pricing publicly known, and only drastic, unwarran ted increases

sends clients packing.

Conversely, in the post-advertising era, XYZ must always be aware

of market pricing because the demand curve is steeper and more volatile.

Therefore the client base of XYZ is not stable as in the previous example

and measures must be taken to keep price s competitive with other firms

regardless of cost inferences. The result is the necessity of a more

aggre...