Pricing Part5

ACCA F5 - Performance Management 

Profit maximization: (MC = MR, satisfies where TR-TC gives highest figure)

Profit maximization means highest gap between total revenue and total cost. Form the table 1 we see that the highest figure is when marginal cost and marginal revenue are equal.

In table 1, we see that maximum profit figure of 100 is achieved for sales figure of 5 units where marginal revenue and marginal cost is also 100each. (i.e. MC = MR = 100)

Revenue maximization: (MR = 0, where price elasticity is unity) Revenue maximization can be used for securing market position or acquiring new market for future profit maximization.

In table 2, we see that at output of 10 units total revenue is at its maximum value, average revenue is zero and price elasticity of product is -1.1(i.e. similar to -1). However, the profit figure is (-200). This shows it is not likely that maximization of total revenue always generates profit. Before profit fall to zero or negative, maximization of total revenue can generate substantial amount of profit but less then that at profit maximization level.

Understanding competition:

	Perfect Competition	Monopoly	Monopolistic Competition	Oligopoly
Seller	Many	One	Many	Few
Buyer	Many	Many	Many	Many
Product	Homogenous	Unique	Differentiated	Homogenous
Information	Perfect	Imperfect	Slightly Imperfect	Slightly Imperfect
Barriers of entry	No	Extreme	No	limited

Pricing strategies:

Ø  Cost plus pricing - mark up percentage is added to cover profit.

Ø  Volume discounting - used to increase market share and it helps revenue maximization

Ø  Premium pricing - above normal cost because of brand recognition, quality and customer's

Ø  Economy pricing - no-frill businesses, which offer basic products for lower profit level

Ø  Market skimming - high charge for product during introduction period of product life cycle

Ø  Penetration - low charge for product by firm during introduction to gain market share

Ø  Complementary product pricing - adjusting price of complementing products E.g. razor and razor blades

Ø  Product line pricing - price differentiation because of different in quality, styles, color,  specification e.t.c

Ø  Price discrimination - different price in different market (market is separated by membership, territory, gender etc).

Ø  Relevant cost pricing - price which takes account of only relevant cost. Basically, involved in investment/financing decision.

Comparing the four main market structures