3. Pricing to Optimize Revenues. How should prices be set relative to cost – benefits? When should a firm lower or raise its prices? What is the reaction of competitors and customers likely to be when a firm adjusts its prices? When can a firm give away its products?.
Pricing to Optimize Revenues
How should prices be set relative to cost – benefits?
When should a firm lower or raise its prices?
What is the reaction of competitors and customers likely to be when a firm adjusts its prices?
When can a firm give away its products?
Profits= revenues - variable costs - fixed costs
= PQ - VCQ – FC
= ( P - VC)Q - FC
= Contribution margin – FC
= (Contribution margin per unit) Q – FC
The price (column A), per-unit variable cost (B), and quantity sold (C) are given. Revenues (E) are the product of price (A) and quantity sold (C). Variable costs (F) are the product of per-unit variable cost (B) and quantity sold (C). As defined in the text, the contribution margin (G) is equal to the revenues (E) minus variable costs (F). The product’s operating income is the contribution margin minus fixed costs.
A - BA X CB X CE - FG – H
A firm sets its prices by adding a markup to its costs or subtracting a markdown from the costs.
Not all demand curves are linear and slope downward as in this example demand curves for luxury goods may slope upward since more people buy luxury items at higher prices.
*For simplicity, we assume that when products are sold separately, each customer will buy only the product that he or she values most; Good = 30,000,000 x $60, Excellent = 20,000,000 x $70.
Type ofNo. ofGood +Firm’s
Revenues1.8 bil*1.4 bil*
Total Revenues3.2 bil4.25 bil