Identify the elements that make up a price.
Price is the money or other considerations (such as barter) exchanged for the ownership or use
of a good or service. Although price typically involves money, the amount exchanged is often
different from the list or quoted price because of incentives (rebates, discounts, etc.), allowances
(trade), and extra fees (finance charges, surcharges, etc.).
Recognize the objectives a firm has in setting prices and the constraints that restrict the
range of prices a firm can charge.
Pricing objectives specify the role of price in a firm's marketing strategy and may include profit,
sales revenue, market share, unit volume, survival, or some socially responsible price level.
Pricing constraints that restrict a firm's pricing flexibility include demand, product newness, other
products sold by the firm, production and marketing costs, cost of price changes, type of
competitive market, and the prices of competitive substitutes.
Explain what a demand curve is and the role of revenues in pricing decisions.
A demand curve is a graph relating the quantity sold and price, which shows the maximum
number of units that will be sold at a given price. Three demand factors affect price: (
price and availability of substitute products, and (
consumer income. These demand
factors determine consumers' willingness and ability to pay for goods and services. Assuming
these demand factors remain unchanged, if the price of a product is lowered or raised, then the
quantity demanded for it will increase or decrease, respectively. Three important forms of
revenues impact a firm's pricing decisions: (
total revenue, which is the total money received
from the sale of a product; (
average revenue, which is the average amount of money received
for selling one unit of a product (which is simply the price of the unit); and (
which is the change in total revenue that results from producing and marketing one additional
Describe what price elasticity of demand means to a manager facing a pricing decision.
Price elasticity of demand measures the responsiveness of units of a product sold to a change in
price, which is expressed as the percentage change in the quantity of a product demanded
divided by the percentage change in price. Price elasticity is important to marketing managers
because a change in price usually has an important effect on the number of units of the product
sold and on total revenue.