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NEED TO KNOW CH. 13 JUNE 24 I. 6 STEPS IN SETTING PRICE FIG 13-3 P. 333 a. STEP 1: OBJECTIVES – aren’t clear and easy. Profit and market share are the 2 major pricing objectives but are often confliction. Challenge: come up with a price that is profitable but also supports market share (can’t ignore any of the objectives) i. PROFIT – ultimately has to be an objective (will be later but doesn’t have to be now). Gross profit or net profit. ; SALES; MARKET SHARE - calculated in 2 ways: units and dollars ; VOLUME (units) ii. CONSTRAINTS 1. DEMAND – changes over the PLC. Will price the product differently at the 3 stages. Important to know when industry is moving through the stages ; PLC (product life cycle) ; COST – over time the cost changes (fixed and variable costs). 2 main reasons: 1) some fixed costs get paid off (cost structure changes) 2) can reap advantage of economies of scale (buying larger quantities and costs of production decrease) ; COMPETITION b. STEP 2: ESTIMATE DEMAND AND REVENUE : if I can estimate demand then I can have a better idea as to what shape/length my PLC is going to be. If I can also forecast demand I can know what economies of scale to expect. i. DEMAND CURVES FIG 13-5 P. 340 1. MOVEMENT ALONG VS. SHIFT Along: Shift: represents the new demand (likely to happen from some sort of promotion) ii. ESTIMATING REVENUES FIG 13-6 P. 341 1. TOTAL REVENUE : P * Q 2. AVERAGE REVENUE: TR/Q = P LOOKING BACKWARD – HAVE WE BEEN PROFITABLE? 3. MARGINAL (NEXT) REVENUE: CHANGE IN TR/ 1 UNIT INCREASE IN Q = SLOPE OF TR CURVE MEANS: IF I SELL THIS NUMBER OF ITEMS TOMORROW WHAT WILL MY SELLING PRICE BE FOR THE NEXT UNIT THAT I SELL. HELPS US PLAN WHERE WE WANT TO GO. iii. PRICE ELASTICITY OF DEMAND : will tell you how much you expect your Q to increase E = PRECENTAGE CHANGE IN QUANTITY DEMANDED PERCENT CHANGE IN PRICE Eg. Yr. 2000: $22.80/unit sold: 12, 680 Yr. 2005: $17.75/unit sold: 17,460
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E = (17,460 – 12, 680) 12, 680 = 1.7 (22.80-17.75) 22.80 - if you reduce prices by 10%, then 10% * 1.7 = 17 % change in Q. means that Q will go up 17%.
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