pricing decisions Flashcards
when demand is linear what is the equation for the demand curve
P= a-bq
what do letters stand for
p= price
a= the price at which demand is 0 or y intercept
q= quantity demanded
b = change in price / change in quantity
what is the marginal revenue/ m marginal cost formula
a- 2bQ
what is cost plus pricing
take cost (at least variable cost \0and add the desire profit on that to get he price
advantages of full cost plus pricing
- quick and simple method of calculating price
- using the full cost plus pricing the company ensures to recover all cost through selling price
- when there is no market price usually this method is preffered
disadvantages of full cost plus pricing
- fails to recognize that costs have an impact on demand
- price of product may need to be adjusted to in line of competition
- needs to estimate budget output and overhead cost, thus there comes the issue of over/under absorbed overheads
what is marginal/variable cost pricing
it involves setting the price based on adding the desired profit with variable cost
what are the advantages to marginal cost pricing
simple and easy to use
can lower price to boost demand
the mark up can be varied by more to reflect market demand conditions
it draws management attention to contribution, and the effects of higher or lower sales volumes on profit]
what are the disadvantages of marginal cost pricing
although mark up can be adjusted to reflect demand conditions still doesn’t consider the price consumers are willing to pay
ignores fixed overheads in pricing decisions, but the sales price must be sufficiently high to ensure that a profit is made after covering fixed costs
what is market skimming
a pricing approach in which the producer sets a high introductory price to attract buyers with a strong desire for the product and the resources to buy it, and then gradually reduces the price to attract the next and subsequent layers of the market.
what circumstances would favor a penetration pricing policy:
4
1.highly elastic demand for the product
if company can get Eos then can keep reducing price a lot
the life cycle of product is long so can make full use of all demand and doesn’t need to reduce prices very early
the company is producing a product that is similar or identical to the competitors product therefore to attract the customers the company might implement penetration policy
what are complementary products
Complementary goods are two or more goods typically consumed or used together, such that a change in the price or availability of one good affects the demand for the other good. A good example of complementary goods would be video games and gaming consoles.
what is price discrimination
the action of selling the same product at different prices to different buyers, in order to maximize sales and profits.
in what ways can price discrimination occur
by age
by market segment
by place
by time
what is relevant cost plus pricing
relevant cost, also called differential cost, is a management accounting term decsribing costs that pertain to a particular decision. Relevant costs will vary based on the context of the decision, such as an omnichannel business analysis by a multi-platform retailer.
