Pricing Decisions (2) Flashcards
How is it possible to try to estimate the “optimal” selling price?
By combining an analysis of both costs and demand factors. Designed to maximise short-term profitability
What does the demand equation show?
The relationship between the price charged for a product and the subsequent demand for that product
Is a linear relationship likely to happen?
No
What happens when demand is linear?
The equation for demand is P = a - bQ
How is marginal revenue determined?
By the demand curve. MR = a - 2bQ
What is worthwhile for a company to do?
Sell further units when increase in revenue gained from the sale of next unit is greater than cost of making it
What does economic theory suggest?
To sell more, the selling price will need to be reduced
The result of marginal revenue generated by selling another unit?
It will continually fall as output rises
The marginal revenue generated by selling another unit?
Will continually fall as output rises
Why is there a point at which it is not worth cutting the price any further?
As revenue generated by selling another unit (MR) is below marginal cost of producing it
Profit is maximised only up to?
The output level where marginal cost has risen to be exactly equal to the marginal revenue
When is the selling price said to be “optimal”?
Where profit is maximised at level of output where marginal revenue = marginal cost
Step 1 in determining optimal price using equations?
Determine the demand function
Step 2 in determining optimal price using equations?
Make MR equation given equal to the value of MC
Step 3 in determining optimal price using equations?
Substitute the values for a and b in Step 1 into MR formulae and solve to find Q
