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1
Pricing
• Price: the assignment of value, or the
amount the consumer must exchange to
receive the offering
Money, goods, services, favors, votes, or anything
else that has value to the other party
• Value = Benefits/Price
Can include monetary and nonmonetary costs, and
opportunity costs
Figure.1
Steps in the Price Planning Process
3
Step 1: Develop Pricing Objectives
• Sales or market share objectives
• Profit objectives
• Competitive effect objectives
• Customer satisfaction objectives
4
Step 2: Estimate Demand
• Forecasting
How much of a product are customers willing to buy
as its price goes up or down?
11-5
Figure.2: Demand Curves
11-6
Figure.3: Shifts in Demand
• An upward shift in the
demand curve means
that at any given price,
demand is greater than
before the shift occurs,
due to:
Advertising
New products
Weather
Economic conditions
11-7
The Price Elasticity of Demand
• How sensitive (responsive) are customers to
changes in the price of a product?
• The percentage change in unit sales that results
from a percentage change in price.
Percentage change in quantity demanded / Percentage change in price
>1 = Elastic <1 = Inelastic
 When changes in price have large effects on the amount demanded,
demand is elastic
 When changes in price have little or no effect on the amount
demanded, demand is inelastic
11-8
Elastic and Inelastic
Demand Curves
11-9
Relationship of TR to price elasticity
• Elastic
Price and total
revenue work in
opposite directions.
If price goes down,
quantity demanded
goes up to a great
extent so that TR
increases.
• Inelastic
 Price and total
revenue change in
the same direction.
If price goes down,
quantity demanded
goes up, but only to
a small extent; TR
actually decreases
11-10
Total Costs
Sum of the Fixed and Variable Costs for a Set
Number of Units Produced
Step 3: Determine Costs
Fixed Costs
Costs that don’t
vary with the
number of units
produced.
Utilities,
Equipment
Costs
Variable Costs
Costs of production
that do vary with
the number of units
produced.
Processed Materials,
Raw
materials
11
Break-Even Analysis
• A method to determine the number of units
a firm must produce and sell at a given
price to cover all its costs.
• Break-even point:
point at which a firm doesn’t lose any money and
doesn’t make any profit
Any unit a firm sells beyond this break-even quantity
will generate a profit.
11-12
My Break-Even Analysis
• Profit = TR – TC
• 0 = p*q – [FC + (VC*q)]
EX. Calculate the Break-Even quantity
where
price of sells unit 2.4
Variable Costs to unit 1.6
Fixed Costs 40000
11-13
Figure 12.5: Break-Even Analysis

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pricing .pdf.pdf

  • 1. 1 Pricing • Price: the assignment of value, or the amount the consumer must exchange to receive the offering Money, goods, services, favors, votes, or anything else that has value to the other party • Value = Benefits/Price Can include monetary and nonmonetary costs, and opportunity costs
  • 2. Figure.1 Steps in the Price Planning Process
  • 3. 3 Step 1: Develop Pricing Objectives • Sales or market share objectives • Profit objectives • Competitive effect objectives • Customer satisfaction objectives
  • 4. 4 Step 2: Estimate Demand • Forecasting How much of a product are customers willing to buy as its price goes up or down?
  • 6. 11-6 Figure.3: Shifts in Demand • An upward shift in the demand curve means that at any given price, demand is greater than before the shift occurs, due to: Advertising New products Weather Economic conditions
  • 7. 11-7 The Price Elasticity of Demand • How sensitive (responsive) are customers to changes in the price of a product? • The percentage change in unit sales that results from a percentage change in price. Percentage change in quantity demanded / Percentage change in price >1 = Elastic <1 = Inelastic  When changes in price have large effects on the amount demanded, demand is elastic  When changes in price have little or no effect on the amount demanded, demand is inelastic
  • 9. 11-9 Relationship of TR to price elasticity • Elastic Price and total revenue work in opposite directions. If price goes down, quantity demanded goes up to a great extent so that TR increases. • Inelastic  Price and total revenue change in the same direction. If price goes down, quantity demanded goes up, but only to a small extent; TR actually decreases
  • 10. 11-10 Total Costs Sum of the Fixed and Variable Costs for a Set Number of Units Produced Step 3: Determine Costs Fixed Costs Costs that don’t vary with the number of units produced. Utilities, Equipment Costs Variable Costs Costs of production that do vary with the number of units produced. Processed Materials, Raw materials
  • 11. 11 Break-Even Analysis • A method to determine the number of units a firm must produce and sell at a given price to cover all its costs. • Break-even point: point at which a firm doesn’t lose any money and doesn’t make any profit Any unit a firm sells beyond this break-even quantity will generate a profit.
  • 12. 11-12 My Break-Even Analysis • Profit = TR – TC • 0 = p*q – [FC + (VC*q)] EX. Calculate the Break-Even quantity where price of sells unit 2.4 Variable Costs to unit 1.6 Fixed Costs 40000