chapter 13

What is the difference between a movement along and a shift of a demand curve?

A demand curve is a graph that relates the quantity sold and price, showing the maximum number of units that will be sold at a given price. A movement along a demand curve (up or down) for a product occurs when its price is lowered or increased and the quantity demanded for it correspondingly increases or decreases, assuming that other factors such as consumer tastes, promotion (advertising and/or sales promotion), price and availability of substitute products, and/or consumer incomes remain unchanged. However, if one or more of these factors do change, then the demand curve for a product will shift to the right or left based on whether the change(s) was favorable or not. This means that there will be either an increase or decrease in demand for the product based on the change in the factor(s).

demand curve

A graph that relates the quantity sold and price, showing the maximum number of units that will be sold at a given price

break-even chart

A graphic presentation of the break-even analysis that shows when total revenue and total cost intersect to identify profit or loss for a given quantity sold.

break-even analysis

A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

What is a break-even point?

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point (BEP) is the quantity at which total revenue and total cost are equal. Profit then comes from all units sold beyond the BEP. Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)].

demand factors

Factors that determine consumers willingness and ability to pay for products and services

pricing constraints

Factors that limit the range of prices a firm may set

What is the difference between fixed costs and variable costs?

Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold. Examples of fixed costs are rent on the building, executive salaries, and insurance. Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold. Examples are the direct labor and direct materials used in producing the product and the sales commissions that are tied directly to the quantity sold.

What is the difference between elastic demand and inelastic demand?

Price elasticity of demand is the percentage change in the quantity demanded relative to a percentage change in price and is expressed as follows: Price elasticity of demand (E) = Percentage change in quantity demanded (%∆ in Q) ÷ Percentage change in price (%∆ in P). Elastic demand exists when a 1 percent decrease in price produces more than a 1 percent increase in quantity demanded, thereby actually increasing total revenue. This results in a price elasticity that is greater than 1. Inelastic demand exists when a 1 percent decrease in price produces less than a 1 percent increase in quantity demanded, thereby actually decreasing total revenue. This results in a price elasticity that is less than 1.

What is the profit equation?

Price has a direct effect on a firm's profits, which can be expressed in the following profit equation: Profit = Total revenue − Total cost or [(Unit price × Quantity sold) − (Fixed cost + Variable cost)].

What is price?

Price is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service.

What are examples of (1) consumer-driven and (2) seller- or retailer-driven pricing actions made possible through price transparency on the Internet?

Price transparency occurs as a result of a consumer's near-instantaneous access to competitors' prices for the same offering through the Internet. Two dimensions of price transparency are: (1) Consumer-driven pricing actions, in which consumers make more efficient buying decisions by comparing the price of an item first in the store and then on the Internet using a smartphone. If the price is lower on the Internet, they'll ask the store to match the price or go home and buy the item online. This behavior is called showrooming. (2) Seller- or retailer-driven pricing actions, in which sellers can quickly change their online prices. This is made possible by Internet-based dynamic pricing, in which the seller changes prices in response to its existing inventory and the prices of its competitors.

What is the difference between pricing objectives and pricing constraints?

Pricing objectives involve specifying the role of price in an organization's marketing and strategic plans whereas pricing constraints are factors that limit the range of prices a firm may set

What factors impact the list price to determine the final price?

Several factors increase or decrease the final price of an offering that the consumer pays. These factors help construct the price equation, which includes incentives, such as cash discounts, allowances, and rebates, that decrease the final price and extra fees or surcharges that increase the final price.

pricing objectives

Specifying the role of price in an organization marketing and strategic plans

price

The money or other considerations exchanged for the ownership or use of a product or service

price elasticity of demand

The percentage change in quantity demanded relative to a percentage change in price

Barter

The practice of exchanging products and services for other products and services rather than for money

value pricing

The practice of simultaneously increasing product and service benefits while maintaining or decreasing price

break-even point

The quantity at which total revenue and total cost are equal

value

The ratio of perceived benefits to price

How does the type of competitive market a firm is in affect its range in setting prices?

The seller's price is constrained by the type of market in which it competes. Economists generally delineate four types of competitive markets: (1) With pure competition, there are many sellers who follow the market price for identical, commodity products. (2) With monopolistic competition, there are many sellers who compete on nonprice factors such as product features and advertising. (3) With an oligopoly, there are (a) a few sellers who are sensitive to each other's prices and (b) a firm that is a price leader that sets the market price that other firms follow. The firms that are price followers set a price based on the prices set by their competitors to avoid a price war. (4) With a pure monopoly, there is one seller in the market who can set any price it wants for its unique product.

fixed cost

The sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold

variable cost

The sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

total cost

The total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost

total revenue

The total money received from the sale of a product

What is total revenue and how is it calculated?

Total revenue (TR) is the total money received from the sale of a product. Total revenue (TR) equals the product's unit price (P) times the quantity sold (Q) or TR = P × Q.

profit equation

total rev-total expenses

unit variable cost

variable cost expressed on a per unit basis for a product