Pricing Flashcards

1
Q

What is Price Elasticity of Demand?

A

It is the measure of responsiveness in the level of quantity demanded to a change in price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the formula for calculating Price Elasticity of Demand?

A

PED = % Change in Quantity Demanded / % Change in Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

When PED > 1 is demand elastic or inelastic?

A

Elastic

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does elastic demand mean?

A

A small change in price will cause a proportionally greater change in the quantity demanded.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

When PED < 1 , is demand elastic or inelastic?

A

Inelastic

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does inelastic demand mean?

A

Changes in price of a product do not create large changes in demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the formula of the demand function?

A

P = a - bQ

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Explain each of the elements of the demand function: P = a -bQ

A
P = seling price
Q = quantity demanded at that price
a = maximum theoretical price (y intercept)
b = gradient of demand line*

*where b = change in price / change in quantity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How is inelastic demand shown graphically?

A

Steeper demand curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How is elastic demand shown graphically?

A

Shallower demand curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the optimal price?

A

The level of output at which profit is maximised.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the formula to derive the optimal price / profit maximisation?

A

Marginal Revenue = Marginal Cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

At which point is revenue maximised?

A

Where Marginal Revenue = 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the formula for marginal revenue?

A

MR = a - 2bQ

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the gradient of the Total Revenue line also known as?

A

Marginal Revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the gradient of the Total Cost curve also known as?

A

Marginal Cost

17
Q

What is marginal revenue?

A

The additional revenue gained as a result of selling one more unit.

18
Q

What is marginal cost?

A

The additional cost incurred as a result of producing one more unit.

19
Q

How would we derive the profit maximising price?

A
  1. Derive the demand function
  2. Derive the profit maximising quantity (MR = VC)
  3. Sub quantity back into the demand function to find the price.
20
Q

What is the Total Cost Function?

A

Y = a + bx

21
Q

What are the four cost plus pricing strategies?

A

Full Cost (absorption)
Marginal Cost
Relevant Cost
Standard Cost

22
Q

What are the three benefits of cost plus pricing?

A
  • easy to calculate
  • readily determined
  • doesn’t require a linear and stable price/quantity relationship.
23
Q

What are the three disadvantages of cost plus pricing?

A
  • Ignores demand and competitors
  • Price may need to be adjusted to reflect market conditions
  • If basis for absorbing overheads changes then product price will change so absorbtion costing methods require accurate calculations.
24
Q

What are the two pricing strategies for New Products?

A

Market Penetration

Market Skimming

25
Q

What is market penetration?

A

A policy of low prices when the product is launched in order to obtain sales volume and market share.

Quickly hits the growth stage but may incur initial loss in using this strategy to get people interested.

26
Q

What is market penetration useful for?

A
  • discouraging new entrants to the market
  • shortening the initial period of the products
  • achieving significant economies of scale
27
Q

What is market skimming?

A

Policy of charging high prices when the product is first launched in order to try to recover development costs quickly and gain high unit profits early in the products life.

28
Q

When is it useful to use market skimming?

A
  • when a product is new and different and customers are willing to pay high prices to be the first ones with the product (iphones)
  • Product has short life cycle so need to recover development costs and make profits quickly.
29
Q

Name other pricing strategies that may be used and give an example.

A
  1. Premium Pricing
    - making a product appear different as to justify a higher price
  2. Price discrimination
    - Age, location, cabin price, cinema etc.
  3. Product bundling
    - Group of products bought together at a lower price than if bought together
  4. Psychological pricing
    - $9.99 instead of $10