chapter 19b

sometimes companies minimize or ignore importance of demand and decide to price their products largely or solely on basis of cost
true
variable cost
cost that varies with changes in level of output (cost of materials)
fixed cost
does not change as output increases or decreases (rent)
average variable cost- AVC
total variable cost/ quantity of output- used to compare cost of production to selling price of product
average total cost- ATC
total costs/ quantity of output
AFC- average fixed cost
total fixed costs/ quantity of output- declines continually bc fixed costs are constant
Marginal Cost- MC
change in total costs associated with one unit change in output
why does MC fall and then turn upward
diminishing returns- less output is produced for every additional dollar spent on variable input
MC intersects both AVC and ATC at their lowest possible points
true
determinant of pricing: markup pricing
most popular method used by wholesalers and retailers to establish selling prices- uses cost of buying product from producer plus amounts for profit and expenses not otherwise accounted for
determinant of pricing: markup pricing does not directly analyze the cost of production
true
determinant of pricing: why do retailers use markup pricing
many important figures on financial reports are sales figures, not cost figures
determinant of pricing: markup pricing- manager must calculate the adequate
gross margin- amount added to cost to determine price
determinant of pricing: keystoning
practice of marking up prices by 100% aka doubling cost
determinant of pricing: profit maximization pricing
producers use more complicated methods- occurs when marginal revenue = MC
marginal revenue MR
extra revenue associated with selling an extra unit of output. as long as the rev of last unit produced and sold is greater than cost of last unit produced and sold, firm should continue manufacturing and selling product
determinant of pricing: profit maximizing quantity
MC=MR
determinant of pricing: break even pricing- analysis
determines what sales volume must be reached before company breaks even and no profits are earned
determinant of pricing: break even model assumes
given fixed cost and constant AVC
determinant of pricing: formula for calculating break even quantities
q= total fixed costs/ fixed cost contribution (the price minus the AVC)
determinant of pricing: break even pricing advantages
provides quick estimate of how much firm must sell to break even and how much profit can be earned if higher sales volume is obtained
determinant of pricing: limitations of break even pricing
sometimes it is hard to know wether a cost is fixed or variable, simple break even analysis ignored demand
other factors besides demand and costs that can influence price
product life cycle, competition, product distribution strategy, promotion strategy, guaranteed price matching, demands of large customers, perceived quality
other factors besides demand and costs that can influence price: product life cycle- introductory stage
usually: high prices to recover from development costs quickly. Price sensitive market: price product at market level or lower
other factors besides demand and costs that can influence price: product life cycle- growth stage
prices begin to stabilize because competitors have entered, product is appealing to broader market and economies of scale are lowering cost (savings can be passed to customers)
other factors besides demand and costs that can influence price: product life cycle-maturity stage
price decreases as competition increase and high cost firms are eliminated. distribution channels become significant cost factor. price increases are only cost initiated, price reductions do not stimulate much demand because remaining comp can match
other factors besides demand and costs that can influence price: product life cycle-decline
further price decreases with few competitors trying to salvage the demand. when only one firm is left prices can stabilize
other factors besides demand and costs that can influence price: distribution strategy
effective distribution network can overcome minor flaws in marketing mix so even if product is sold at higher price, consumer may buy the product anyways because it is convenient
other factors besides demand and costs that can influence price: distribution strategy- how to create an adequate distribution for a new product
offer a larger than usual profit margin to distributors
other factors besides demand and costs that can influence price: distribution- selling against the brand d
distributors are stocking well known brands at high prices on same shelves as store brands at discounted prices
other factors besides demand and costs that can influence price: impact of internet and extranets (what is it and what are extranets
extranets- private electronic networks. connecting buyers and sellers so it is quick and easy to compare products and prices for consumers. at same time technology allows sellers to collect detailed data about customers
other factors besides demand and costs that can influence price: impact of internet and extranets- types
shopping bots- programs that search web for best price of particular item (broad based and niche oriented) internet auctions
other factors besides demand and costs that can influence price: promotion strategy
price can be used as a promotional tool to increase consumer interest, it can also be a tool for trade promotions
other factors besides demand and costs that can influence price: demands of large customers
large customers such as department stores or walmart make specific pricing demands that suppliers must agree to
other factors besides demand and costs that can influence price: relationship of price to quality- psychological state
a consumers psychological state at the time of purchase has significant impact on their perception of price and quality
other factors besides demand and costs that can influence price: relationship of price to quality- prestige pricing
charging a high price to help promote a high quality image
other factors besides demand and costs that can influence price: relationship of price to quality- hedonistic
high purchase prices can create feelings of pleasure and excitement- pursuing emotional responses associated with using a product
other factors besides demand and costs that can influence price: relationship of price to quality- allocative effect
notion that consumers must allocate their budget across alternative goods- the more you spend on one product the less you have to spend on all others- prefer low prices
other factors besides demand and costs that can influence price: relationship of price to quality- dimensions of quality- which focuses to assess quality makes price strong indicator of perceived overall quality
ease of use, versatility, durability, serviceability (ease of obtaining repairs), performance, prestige- durability and prestige