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How Price Determined?

How Price Determined?. MARGINAL PRICING There are two conditions: MC = MR Slope of MC > Slope of MR. How Price is Determined?. Consider the Demand Function Q = 10 – 2P ------- (1) ‏ TC = 50 + 2Q ------- (2) ‏ MC =  TC/  Q = 2.

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How Price Determined?

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  1. How Price Determined? • MARGINAL PRICING There are two conditions: • MC = MR • Slope of MC > Slope of MR

  2. How Price is Determined? • Consider the Demand Function Q = 10 – 2P ------- (1)‏ TC = 50 + 2Q ------- (2)‏ MC =  TC/  Q = 2

  3. How Price is Determined? MR =  TR/  Q TR = P.Q from (1)‏ TR = (5 – 0.5 Q) Q MR = 5 – Q Equilibrium, MC = MR 5 - Q = 2; Q = 3 Substituting Q in (1)‏ P = 3.5

  4. How Price is Determined? Price CS MC 3.5 DD MR 0 3.0 Quantity

  5. Pricing Practices • Mark-Up pricing or Cost Plus Pricing • Price = Cost + Mark-up • P = AVC + GPM = AC • GPM = AFC + NPM • Price = Cost (1 + Mark-up)‏ • Cost = Rs. 100; • Mark-up = 25% • Rs. 100 + 25 = 125 • Mark-up is the difference between price and Cost

  6. Mark-up pricing • Whether this price optimal? • Depends on the value of price elasticity • Cost = 100 • ep = -1.8 -1 • Mark-up = ----------- -1.8+1 • Optimal Price = Rs.100 (1 + 1.25) = Rs. 2.25

  7. Transfer Pricing • Pricing of intermediate products sold by one division of a firm and purchased by another division of the same firm • Made necessary by decentralization and the creation of semiautonomous profit centers within firms

  8. Transfer Pricing • Why? • the price paid by a division affects the output of each division and, therefore, the output of the entire enterprise. • transfer prices affect the profitability of the divisions involved in the transfer of the intermediate products, and, as such, they serve as inceptives and rewards for the efficient operation of the various divisions of the enterprise. • Too-low transfer prices artificially reduce the profitability of the producing division and artificially increase the profitability of the purchasing division, and these can undermine the morale of managers, officers, and workers of the former because salary increases and bonuses, and sometimes even their jobs, depend on the profitability of the division.

  9. Transfer Pricing • Geared towards maximising total company profit • Final pricing may be dictated centrally from the top corporation

  10. Alternate Ways of Pricing • Bundling Pricing • Free with bundle of products • Internet explorer free with windows • Two for the price of one • Power steering with new cars • Block Pricing • Single uniform pricing • Club membership free • Two Part Pricing • Pricing in two stages • Membership fee and then user fee • Per unit fee = MC + fixed equal to consumers surplus • Peak Load Pricing • Pricing when high demand • Telephone Tarriff

  11. Alternate Ways of Pricing • Tie – in – Sales Pricing Bundling Required Tie –in – Sales (required to buy by technology)‏ - Windows with HP computers • Predatory Pricing • Price < or = minimum of AC • Entry preventing • Skimming pricing • From higher price to lower • For new products before competition starts • Penetrating Pricing • From lower price to high • Consumer Durables

  12. Alternate Ways of Pricing • Prestige Pricing • Prestige that ownership bestows on the buyer • Demand high at higher price

  13. Thank you

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