BUS 202 Lecture Notes - Lecture 16: Profit Margin, Marginal Cost, Marginal Revenue

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Chapter 16 Notes
1. Discuss the importance of pricing decisions to the economy and to the individual firm.
Pricing plays an integral role in the Canadian economy by allocating goods and services among
consumers, governments, and businesses. Pricing is essential in business because it creates revenue,
which is the basis of all business activity. In setting prices, marketing managers strive to find a level
high enough to produce a satisfactory profit.
2. List and explain a variety of pricing objectives.
Estalishig ealisti ad easuale piig ojetives is a itial pat of a fi’s aketig
strategy. Pricing objectives are commonly classified into three categories: profit oriented, sales
oriented, and status quo. Profit-oriented pricing is based on profit maximization, a satisfactory level
of profit, or a target return on investment. The goal of profit maximization is setting prices to
produce profits that will satisfy management and its stockholders. The most common profit-
oriented strategy is priig fo a speifi etu o ivestet elative to a fi’s assets. The seod
type of pricing objective is sales oriented, and focuses on either maintain a percentage share of the
market or maximizing dollar or unit sales. The third type of pricing objective aims to maintain the
status uo  athig opetito’s pie.
3. Explain the role of demand in price determination.
Demand is the key determinant of price. When establishing prices, a firm must first determine
demand for its product. A typical demand schedule shows and inverse relationship between
quantity demanded and price: when price is lowered, sales increase; when price is increased, the
quantity demanded falls. For prestige products, however, there may be a direct relationship
between demand and price: the quantity demanded would increase as price increases. Marketing
managers must also demand elasticity when setting prices. Elasticity of demand is the degree to
which the quantity demanded fluctuates with changes in price. If consumers are sensitive to
changes in price, demand is elastic; if they are insensitive to price changes, demand is inelastic. Thus
an increase in price will result in lower sales for an elastic product and little or no loss in sales for an
inelastic product. Inelastic demands creates pricing power.
4. Understand the concept of yield management systems.
Yield management systems use complex mathematical software to profitably fill unused capacity.
The software uses techniques such as discounting early purchases, limiting early sales at these
discounted prices, and overbooking capacity. These systems are primarily used in service businesses
and are substantially raising revenues. The use of internet cookies and targeting software enables
on-line retailers to offer different pricing and promotional offers to on-line shopping and browsing
habits.
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Document Summary

Chapter 16 notes: discuss the importance of pricing decisions to the economy and to the individual firm. Pricing plays an integral role in the canadian economy by allocating goods and services among consumers, governments, and businesses. Pricing is essential in business because it creates revenue, which is the basis of all business activity. In setting prices, marketing managers strive to find a level high enough to produce a satisfactory profit: list and explain a variety of pricing objectives. Esta(cid:271)lishi(cid:374)g (cid:396)ealisti(cid:272) a(cid:374)d (cid:373)easu(cid:396)a(cid:271)le p(cid:396)i(cid:272)i(cid:374)g o(cid:271)je(cid:272)tives is a (cid:272)(cid:396)iti(cid:272)al pa(cid:396)t of a(cid:374)(cid:455) fi(cid:396)(cid:373)"s (cid:373)a(cid:396)keti(cid:374)g strategy. Pricing objectives are commonly classified into three categories: profit oriented, sales oriented, and status quo. Profit-oriented pricing is based on profit maximization, a satisfactory level of profit, or a target return on investment. The goal of profit maximization is setting prices to produce profits that will satisfy management and its stockholders.

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