Two basic approaches to price setting
a.) cost-oriented and
b.) demand-oriented price setting.
(Most firms in the business world set their prices using Cost-Oriented price setting).
# of times avg inv is sold per yr
the process of evaluating the change in total revenue and total cost from selling one more unit (i.e. that one more marginal unit) to find the most profitable price and quantity.
Best is when biggest diff between cost and rev
In practice, the focus is ongetting an estimate of how profit might vary across a range of relevant prices.
whether the firm will be able to cover all its costs at a particular price level.
compute a break-even point?
determine is the fixed-cost (FC) contribution per unit: the assumed selling price per unit minus the variable cost per unit. To find the BEP in units, divide the total fixed costs (TFC) by the contribution per unit.
setting relatively high prices to suggest high-quality or high-status.
offering a specific new price for every job rather than setting a price for all customers
attempts to discover the price range a customer prefers for a given product. Price cuts within the range don’t affect demand very much.
suggests that 80 percent of the business comes from 20 percent of the customers.
adding a reasonable markup to the average cost of a product.
Problem with Average Cost Pricing
it doesn’t consider cost variations at different levels of production/output.
the firm makes a line of products where each product serves an entirely different target market. So there doesn’t have to be any relation between the various prices.
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