MARKET1 GLOSSARY Variable Cost (VC) Fixed Cost (FC) Marginal Cost (MC) Marginal Revenue (MR) : : : : Varies

with the changes in the level of output Does not change as output is increased or decreased Change in total costs associated with a one-unit change in output Extra revenue associated with selling an extra unit of output GENERAL PRICING APPROACHES Definition DEMAND DETERMINANT OF PRICE DEMAND AND SUPPLY Determining the markets price equilibrium, or when demand and supply offset each other The proper balance of demand and supply in the market Shortage place upward pressure on price; demand > supply Surplus place a downward pressure on price; demand < supply Computation

ELASTICITY OF DEMAND Consumer responsiveness or sensitivity to changes in price

- - Elastic Demand Consumer demand is sensitive to changes in prices Inelastic Demand an increase or decrease in price will not significantly affect demand for the product Unitary Elastic Demand total revenue remains the same when prices change - - Factors 1. 2. 3. 4. 5. affecting Elasticity Availability of Substitutes Price relative to purchasing power Product Durability Inflation Rates A products other uses

where,

If E > 1, demand is elastic If E < 1, demand is inelastic If E = 1, demand is unitary COST DETERMINANTS OF PRICE

MARK-UP PRICING Most popular method o Simplifies the pricing process o Fair to both buyer and seller o Price competition minimized Uses the cost of buying the product from the producer plus the amounts of profit and for expenses otherwise accounted for

*Difference between Retail price and Cost is called gross margin. An adequate margin should be able to cover selling expenses and profit.

- - Keystoning the practice of marking up prices by 100% or doubling the cost PROFIT MAXIMIZATION PRICING Occurs when marginal revenue equals marginal cost As long as the last unit produced and sold is greater than its cost, they should still continue manufacturing and selling the product since it generally increases total profits

BREAK-EVEN PRICING Analyzes and determines what sales volume must be reached before total revenue equals total cost Assumes a given Fixed cost and a constant average variable cost

where Disadvantages Determining fixed from variable costs Break-even analysis ignores demand

Advantages Provides a quick estimate of how much the firm must sell to break even Provides how much profit can be earned if a higher sales volume is obtained Not necessary to obtain accounting data regarding MR and MC (which are frequently unavailable)