6 Pricing Decisions

Question 1

When is demand said to be elastic?

Answer 1

If a change in price leads to a more than proportionate change in quantity demanded
Products which can swapped/substituted for a similar product have elastic demand.

Question 2

When is demand said to be inelastic?

Answer 2

If a change in price leads to a less than proportionate change in quantity demanded
Product that have inelastic demand are often premium or luxury products

Question 3

What is cost based pricing (absorption costing)?

Answer 3

Absorption costing is used to calculate a product cost.
A method of pricing would be to add a mark-up to the product cost to account for non-manufacturing overheads and the return that the business wants.

Question 4

What would incorrect pricing lead to?

Answer 4

surplus inventory or the business achieving a lower return than required

Question 5

What is marginal costing?

Answer 5

calculate the direct cost of a product and apply a suitable mark.
The mark-up should cover all overheads and allow for a profit.
the mark-up needs to be realistic if the price is to be competitive.
In the short term it is financially viable to price a product just to cover direct costs.

Question 6

What is a life cycle?

Answer 6

duration of a project’s, product’s or company’s existence

Question 7

Why is ‘cost plus pricing’ not relevant for products with a dynamic environment?

Answer 7

Money will have been invested in research and development before a product is launched and these costs as well as costs of production need to be recouped.
Initial production costs per unit will be high, staff training, new methods of manufacture, new processes.
Advertising and marketing costs will also be high.
These unit costs should fall further into life cycle of product.
Pricing in this type of environment need careful consideration will accurate forecasts of sales and cost over the life of the product.