Simple Pricing Flashcards
Profit equation is
(P - AC) x Q
Many companies think about
how to sell more or how to reduce costs and not much time thinking about price
A demand curve tells you
how much consumers will purchase at a given price
The First Law of Demand says
the consumer will purchase more if the price falls
An aggregate demand curve
is the sum of all individual demand curves
An aggregate or market demand curve
is the relationship between the price and the number of purchases made by a group of consumers
As price decreases, the
quantity of demand increases
If something other than price causes an increase in demand,
the demand shifts to the right or demand increases
Demand curves are used to
change the pricing decision into a quantity decision
Consumers are using marginal analysis to
maximize consumer surplus
Sellers use marginal analysis to
maximize profits
If MR > MC
reduce price
If MR < MC
increase price
To get the best price by taking steps
and recomputing MR and MC to see whether to take another step
To estimate Marginal Revenue
measure quantity responses to past price changes, experimenting with price changes, or surveying potential customers
Price elasticity of demand is computed as
percentage of change in quantity demanded divided by percentage of change in price
Price elasticity measures
the sensitivity of quantity to price
A demand curve for which quantity changes more than price
is said to be elastic or sensitive to price
A demand curve for which quantity changes less than price
is said to be elastic or insensitive to price
if |e| > 1
demand is elastic
if |e| < 1
demand is inelastic
In general, elasticity tells you
how revenue changes as you change price
Elastic Demand: Price increase
Revenue Decrease
Elastic Demand: Price decrease
Revenue Increase
Inelastic Demand: Price increase
Revenue decrease
Inelastic Demand: Price decrease
Revenue increase
The more elastic the demand is
the lower the profit-maximizing price is
Products with close substitutes
have more elastic demand
Consumers respond to price increases
by switching to their next best alternative
Demand for an individual brand is
more elastics than industry aggregate demand
Brand price elasticity is
approximately equals to industry price elasticity divided by brand share
Products with many complements have
less elastic demand
Individual products that are consumed as part of a larger bundle
are complementary goods and have less demand
Another factor affecting elasticity is
time. Given more time, consumers are more responsive to time changes
In the long run, demand curves
become more elastic
As price increases,
demand becomes more elastic
With elasticity and percentage change in price,
you can predict the corresponding change in quantity
Income elasticity of demand measures
the change in demand arising from changes in income
Positive income elasticity means
that the good is normal. That is as income increases, demand increases.
Negative income elasticity means
that the good is inferior. That is as income increases, demand declines
Cross price elasticity of demand measures
the change in good A owing a change in price of good B
A positive cross-price elasticity means
that Good B is a substitute for A
Negative cross-price elasticity means
that Good B is a complement for A
Stay even analysis allows
you to do marginal analysis of pricing by determining the volume required to offset change in price
If predicted quantity decrease is bigger than the stay-even quantity decrease,
then the price increase is not profitable
The stay-even quantity is the function
of the size of the price increase and contribution margin
A proposed price change is profitable
if the predicted quantity loss is less than the stay-even quantity
