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PM > Chapter 7 - Pricing > Flashcards

Chapter 7 - Pricing Flashcards

1
Q

Why is pricing important?

A
  • it makes a pivotal contribution to profit maximisation
  • the amount they are able to sell often determined by the price charged for the goods and services
  • businesses make profits by selling goods at a price higher than their cost
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2
Q

What are the 3 main factors that influence price?

A
  • Customers
  • Competition
  • Cost
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3
Q

What does a perfectly competitive market look like?

A
  • Zero entry/ exit barriers
  • perfect information
  • companies aim to maximize profits
  • homogeneous products
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4
Q

What does an imperfect competitive market look like?

A
  • Monopoly
  • Oligopoly
  • Monopolistic competition
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5
Q

What is a zero entry/exit barriers market?

A

relatively easy to enter or exit as a business in a perfectly competitive market

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6
Q

What perfect information in relation to a competitive market?

A

prices and quality of products are assumed to be known to all consumers and producers

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7
Q

What is monopoly in a imperfect market?

A
  • In which there is only one seller of a good.
  • The seller dominates many buyers and can use its market power to set a profit-maximizing price
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8
Q

What is oligopoly in a imperfect market?

A
  • a few companies dominate the market and are inter-dependent: firms must take into account likely reactions of their rivals to any change in price, output or forms of non-price competition.
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9
Q

What is monopolistic competition?

A
  • products are similar, but not identical.
  • many producers (‘price setters’) and many consumers in a given market, but no business has total control over the market price.
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10
Q

What are the 2 broad approaches to pricing?

A
  • Demand based
  • Cost based
  • marketing based
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11
Q

Economic theory states that the monopolist maximizes profit when what?

A

Marginal cost = marginal revenue

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12
Q

What is marginal revenue?

A

The additional revenue from selling one extra unit

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13
Q

What is the marginal cost?

A

the cost of making one more unit. Usually the variable cost

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14
Q

What is the calculation to establish the linear relationship between price (P) and quantity demanded (Q) in the algebraic approach? (1)

A

P=a - bQ

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15
Q

What is ‘a’ in the algebraic approach?

A

the intercept - here the maximum theoretical price at which demand will fall to zero.

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16
Q

What is ‘b’ in the algebraic approach?

A
  • the gradient of the line - here the amount the price has to change to change the demand by one unit
  • always negative
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17
Q

How do we find the marginal revenue in the marginal revenue? (2)

A

Double the gradient to find the marginal revenue: MR = a -2bQ

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18
Q

What is the third step in the algebraic approach?

A

Establish the marginal cost MC. simply the variable.

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19
Q

How do we maximise the profit in the algebraic approach? (4)

A

equate MC and MR and solve to find Q

20
Q

How do we find the optimum price in the algebraic approach? (5)

A

substitute the value of Q into the price equation to find the optimum price

21
Q

How do we find ‘b’ in the algebraic approach?

A

Change in price/change in quantity

22
Q

What is the tabular approach?

A

involves different prices and volumes of sales being presented in a table

23
Q

What is the equation for the total cost function?

A

y=a + bx

a= the fixed cost per period
b= variable cost per unit
x = the activity level (independent variable)
y = total cost = fixed cost + variable cost (dependent variable)

24
Q

What is the calculation for finding the price?

A

Price = cost per unit + chosen margin or markup

25
Q

What is ‘mark-up’?

A

the profit expressed as a percentage of cost (cost is 100%)

26
Q

What is ‘margin’?

A

the profit expressed as a percentage of the sales price (sales is 100%_

27
Q

What is the main adv of standard costs?

A

the prices can be set in advance and fixed for the period concerned.

28
Q

What is the main dis adv of standard costs?

A

is that if significant variances occur, then the price may have been set too low and a loss ensues

29
Q

What is the main adv of actual costs?

A

a profit is guaranteed, however less incentive for the supplier to control costs as inefficiencies can be passed on to customers.

30
Q

What is the adv of marginal or full cost?

A

Simpler - no need for the absorption of fixed o/hs
Consistent with the use of contribution in decision-making
Useful in short-term decisions.

31
Q

What is the dis adv of marginal cost?

A

Setting an appropriate margin or markup as this will need to ensure all fixed costs are covered

32
Q

What are the advs of using relevant costs?

A
  • can be used to arrive at a minimum tender price for a one-off tender or contract.
  • only suitable for one-off decisions
33
Q

How do you calculate price elasticity of demand PED?

A

Percentage change in demand / percentage change in price

34
Q

If PED < 1 what does this represent?

A

an inelastic product. This means demand is relatively insensitive to price changes

35
Q

If PED > 1 what does this represent?

A

An elastic product: demand is relatively sensitive to price changes. This could occur if the product has many substitutes, or is a luxury item

36
Q

What is market skimming?

A
  • involves charging high prices when a product is first launched, to maximise short-term profitability
37
Q

What are the conditions suitable for market skimming?

A
  • product is new and different
  • has little direct competition
  • short lifecycle and their is a need to recover development costs
  • firm with liquidity problems
38
Q

What is penetration pricing?

A

the charging of low prices when a new product is initially launched in order to gain rapid acceptance

39
Q

What are the conditions suitable for Penetration pricing?

A
  • if a firm wishes to increase market share
  • if firm wishes to discourage new entrants from entering the market
  • if demand is highly elastic so would respond well to low prices
40
Q

What is a complentary product?

A

one that is normally used with another product. e.g., razors and razor blades

41
Q

What is a product line?

A

a range of products that are related to one another

42
Q

When does product line pricing occur?

A

when setting the price steps between various products in a product line, based on:
- cost difference between the products
- customer evaluations of different features
- competitors prices

43
Q

What is volume discounting pricing?

A

offering customers a lower price per unit if they purchase a particular quantity of a product

44
Q

What are some benefits of volume discount pricing?

A
  • increased customer loyalty
  • attracting new customers
  • lower sales processing costs
45
Q

What is pricing discrimination pricing?

A

where a company sells the same product or services at different prices in different markets

46
Q

What are some conditions required for a price-discrimination strategy?

A
  • seller must have some degree of monopoly power
  • effective for services
  • there must be a different price elasticities of demand in each market so that prices can be raised in one and lowered in the other
47
Q

What are some issues with price discrimination?

A
  • competitors join the market and undercut the firms prices
  • customers in the higher price bracket look for alternatives

PM (15 decks)

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