Long Term Pricing

Question 1

How does the LR affects Price Setting?

Answer 1

Most, if not all, costs are variable (relevant).
Needs system to reflect cost of each product for price stability.
Assumed that organisation set prices so profits are maximised.

Question 2

How does LR Affect Price Setting Firms?

Answer 2

Products are differentiated, no comparable market prices.
Uses Cost-Plus Pricing.
Mark-up linked to D, likely to decrease if competition increases.

Question 3

How does LR Affect Price Taking Firms?

Answer 3

Bears price imposed by market.
Must understand profitability, find price by:
* Contribution to product line FC (= sales – direct TC).
* Next, deduct FC directly attributable to product line.
* Finally, deduct FC that cannot be specifically identified with a product line.

Question 4

Factors that Influences D in LR:

Answer 4

• Price of good
• Price of other goods
• Size and distribution of household income
• Tastes and fashion
• Expectations
• Obsolescence

Question 5

Where to Find Profit Maximisation Point on Graph?

Answer 5

MR =MC

Question 6

Equations to Derive Demand:

Answer 6

P = a -bq (straight line)
P= a - bQ / change in Q

Question 7

Factors that Influences S in LR:

Answer 7

• Goals of firm
• Price of commodity
• Price of other commodities
• Price of FOP
• State of tech
• Natural factors (weather)

Question 8

Profit Maximising Formulae:

Answer 8

Profit = TR – TC
Profit = (Average Revenue – Average Costs) x Quantity
Profit maximised, MC = MR
Revenue Maximised, MR = 0

Question 9

What is Marginal Revenue?

Answer 9

MR is the total earned from one extra unit of sale.

Question 10

What is Marginal Cost?

Answer 10

MC is the additional cost of one extra unit.