Thumb Rule of Pricing

ECON 2301 Principles of Macroeconomics Time: Th 7:05 pm – 9:45 pm Synonym: 40512 Section: 023 Room: NRG2 2120

The principal microeconomic issue at work is supply and demand. The author invokes a number of economic theorists (both liberal and conservative) who endorse price gouging out of a belief that it is simply the natural manifestation of a capitalist society that relies on supply and demand. There is a belief that preventing price gouging allows consumers to act with little consequence for their actions. According to this line of thinking, a business is well within its rights to raise prices because they should respond to public demand; at other times, there is little demand, so they are wise to take advantage when there is significant demand. Moreover, economic theorists have argued that price-gouging is positive because it makes people question whether the item they are considering purchasing

15. In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is ( )

Companies in the retail industry operate in a high price elasticity environment as there is not much product differentiation to leverage. Buyers face almost no switching cost if they chose a substitute offering better value. On the contrary, large and diverse population making small purchases works in favor of the industry. No one individual or a small group has the power to significantly impact the industry, but overall buyers enjoy have a high bargaining power in the industry.

If the product coast a large percentage of the average consumer’s income, people will pay more attention to sale prices because they may be afraid of a fact that if the price keeps rising, they can’t afford it because it is expensive and costs most of their income. It is common that we spend more than $200 on one pair of Nike shoes, which are quite expensive. However, the price of bread is low. Furthermore, one pair of Nike shoes costs more percentage of clients’ income than a piece of bread. If the price declines, people would like to buy more Nike shoes because they can’t afford it in normal time. However, people won’t buy too much bread than before because the bread may go rancid quickly. So people are more sensitive to the price of Nike shoes. As a consequence, all Nike shoes sold in Canada have more elasticity than all bread sold in Canada.

DUE via Safe Assign 5pm Sunday 7th May (Note this is later than in Course Outline!)

Explain how a profit maximizing firm determines its optimal level of output, using marginal revenue and marginal cost as criteria:

Two-part pricing: A local surf store estimates that their average customer 's demand per year is P = 3.5 - 0.5Q, and knows that the marginal cost of each rental is $0.5. a- How much should the store charge for an annual membership in order to extract all the consumer surplus using an optimal two-part pricing strategy? b- How much should the store charge for each rental if it uses an optimal two-part pricing strategy?

Indexi = 0.053 - 0.095 Fi + 0.020 PHDi + 0.007 FPHDi + 0.0015 TENi

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Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.

* In the first paragraph, discuss the relevant economic theory of your topic (your textbook is a good source for this paragraph).

As an example, if fixed costs are $100, price per unit is $10, and variable costs per unit are $6, then the break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷$4). When 25 units are produced and sold, each of these units will not only have covered its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess of price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits will grow with each unit demanded above this 25-unit break-even level.

If the profit on sales revenue is 20% then profit on cost will become 25%(20%/80%)

This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-2 The term unit contribution margin refers to the contribution that