Business economics i


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Business economics i

  1. 1. Concepts of Revenue Total Revenue = Price x Qty Average Revenue = TR Qty Marginal Revenue = ∆TR ∆Q TR = EMR
  2. 2. Demand for the product. Meaning full surveys require careful attention to each phase of the process. • Questions must be precisely worded to avoid ambiguity. • Survey sample must be properly selected so that responses are respresentative.
  3. 3. Market Experiments Market experiments are designed to generate data prior to full scale introduction of a product or implementation of a policy.
  4. 4. Steps • Select a test market – several cities, region or a sample of consumers taken from a mailing list. • Experiment may incorporate a number of feature: a)Evaluating consumer perceptions of a new product.
  5. 5. b)Different prices for an existing product may be set in various cities to determine demand elasticity. c) Test of consumer reaction to a new advertising campaign.
  6. 6. Conclusion Market experiments have an advantage over surveys in that they reflect actual consumer behaviour. However, there are risks involved. a) In test market where prices are increased consumers may switch to products of competitors.
  7. 7. b) Result of some market experiments can be influenced by bad weather, changing economic conditions or aacties of competitors. c) Because most experiments are relatively short during, consumers may not be completely aware of pricing or advertising changes. Thus, their responses may understate the probable impact of those changes.
  8. 8. Investment and Stock Markets Economic theory suggests that rise and falls in the stock market should bad firms to change their rates of capital investment in the same direction. The relationship between stock price and firm “investment in physical capital in capture by the ‘Q theory of investment’ by James Tobin.
  9. 9. Q Theory = Rate of investment in any particular type of capital can be predicated by looking at the ratio of the capital’s market value to its replacement cost. Q = V PKk
  10. 10. V = Stock Market value of a firm K = Amount of capital firm owns PK = Price of new capital goods. PKk = Replacement cost of firm’s capital stock.
  11. 11. Pricing Tactics & Strategies • Cost oriented pricing. • Competition oriented pricing • Prices based upon other economic considerations
  12. 12. Full Cost Pricing P = AVC + AFC + Net profit margin The actual price charged by the firm depends upon potential competition and general economic environment – Born vs Depression
  13. 13. Marginal Cost Pricing MC = AVC or Short down point Incremental cost pricing or M Cost pricing is a short run phenomena Rate of Return Pricing = A fixed % mark up over cost.
  14. 14. • Profit as a fixed % of total sales. • A fixed return on existing investments Competition oriented Pricing Pricing and not cost are the guiding principles. Trade Association Pricing
  15. 15. Loss Leader Pricing A loss leader is an item which produces a less than customary contribution or a negative contribution but which is expected to create profits on increased future sales or sales of other items. Administered Pricing Dual Pricing Differential Pricing