Question

Total Profit/Loss = Total Revenue - Total Expenses Revenue = Price * Units Discuss the following pricing concepts: profit, revenue, pricing objectives (profit maximization vs. sales maximization), market share (in units and revenues), demand & supply, price equilibrium (shortage and surplus), the cost determinants of pricing (fixed cost and variable cost), and the breakeven analysis.

Answer 1

Profit - It is the sum left after deducting total expenses incurred from total revenue earned.

Revenue - It is the total proceedings from sales of goods, which is number of units sold multiplied by price per unit.

Pricing objectives - The objectives of pricing is to maximise the sales, which is to attract the maximum buyers to buy the product, so as to not only maximise the market share but also be able to be profitable at lower margins ( i.e. earning more profit through higher numbers)

Market share - The market share can be expressed in terms of percentage of units sold by the company against the total number of such items sold in the market or fraction of revenue earned by the company when measured against total market siZe in terms of revenue.

Demand - It is the per period requirement of a commodity within q group of consumers.

Supply - It is the availability of the commodity from its sources of supply per unit period.

Price equilibrium - When demand increases and supply remains constant, the consumers are willing to pay the high prices for the commodity. However, the high price reduces the consumption of commodity, and the producers would like to produce more of that commodity, which increases the supply and reduces the demand, which in turn brings the price down. This again increases the demand, and this variation continues till an equilibrium is reached which is called price equilibrium.

Variable cost - It is the cost which varies per unit prduced. Example is material cost , packging cost and labour cost ( when the labours get their wages on per unit produced basis).

Fixed cost - It is the cost which the company incurs irrespective of the number of units produced. Examples are fixed employee costs, rent, utilities etc.

BEP - Breakeven point is the number of units, the contribution realised from which is equal to the fixed cost.