Module 5

• The choices businesses make when setting prices for their products or services

  Pricing Decisions
• Considered part of a company’s marketing strategy because it influences its relationship with customers

  Pricing
• When prices are fair and competitive

  customers come back

  increasing the profitability of the business.
• Involves charging what competitors charge for similar goods and services.

  Simple Pricing
• This strategy is often used by retailers and wholesalers selling commodities.

  Simple Pricing
• Companies that make simple pricing decisions often try to increase sales by making small, competitive adjustments such as purchase discounts, volume discounts, and purchase allowances
• In simple pricing, it is a single firm selling a single product at a single price
• Based on the originality of a product or service and what customers are willing to pay for it.

  Complex Pricing
• This type of pricing is determined through negotiation with the customer and is common for custom furniture, artworks, and consulting services.


  Complex Pricing
• First Law of Demand


  Consumers demand more when price falls, assuming other factors are held constant
• Consumers make consumption decisions using marginal analysis
• consume more if marginal value > price
• The marginal value of consuming each subsequent unit diminishes the more you consume
• Consumer surplus = value to consumer - price paid
• Functions that relate the price of a product to the quantity demanded by consumers

  Demand curves
• 1st Marginal Value + 2nd Marginal Value = Total Value
• the total number of units that will be purchased by a group of consumers at a given price;

  the buying behavior of a group of consumers;

  a total of all the individual demand curves.

  Aggregate Demand
• Also known as Aggregate Demand

  Market Demand
• Surplus = Total Value - Total Paid
• Describe buyer behavior and tell you how much they will buy at a given price

  Demand curves
• An extent decision

  Pricing
• Revenue - Cost


  Profit
• turn pricing decisions into quantity decisions

  Demand Curves
• Sell more, but Earn less on each unit sold


  Lower Price
• Sell less, but Earn more on each unit sold


  Higher price
• The fundamental tradeoff is created by downward sloping demand
• Finds the profit-increasing solution to the pricing tradeoff

  Marginal Analysis
• Tells you which direction to go (to raise or lowe price) but not how far to go

  Marginal Analysis
• Change in total revenue from selling another unit.

  Marginal Revenue
• If MR>0


  then total revenue will increase if you sell one more
• If MR>MC


  then total profit will increase if you sell one more
• If MR<0


  then total revenue will decrease if you sell one more
• If MR<MC


  then total profit will decrease if you sell one more
• To maximize Profit, MR = MC
• An economist term to mean responsiveness

  Elasticity
• refers to responsiveness in behavior to changes in price (or some other economic variable)


  Elasticity
• Refers to the responsiveness of consumer demand to a change of price

  Price elasticity of demand
• Refers to the responsiveness of consumer demand to a change in income level

  Income elasticity of demand
• Refers to the responsiveness of consumer demand for a good with respect to price changes of a related good (substitute or complementary good)

  Cross elasticity of demand
• To estimate Price Elasticity of Demand