Chapter 8: Pricing for Profits (Marginal Revenue and Marginal Cost)
Chapter 8: Pricing for Profits (Marginal Revenue and Marginal Cost) Marginal Revenue: Additional revenue from selling one more unit or from extension of sellers -The revenue you get from selling one more product or service -Depends on market structure, how competitive your industry is, and whether your business is a price taker or price maker Fixed Costs: (Suk costs): do not change with changes in quantity of output -For price-taking businesses (extreme competition), Marginal revenue = Price. -For price makers (Monopoly, Oligopoly, Monopolistic Competition), marginal revenue is less than price. Because of one-price rule, businesses must lower price on all units, not just new sales. -Even when price cut increases total revenue, marginal revenue from each additional unit sold decreases as sales increase. -As output increases, what happens to marginal costs depends on supply side of business’s cost. Increasing Marginal Costs -Businesses operating near capacity, or shifting to move expensive sources of inputs, have increasing marginal costs to increase output. Constant Marginal Cost -Businesses not operating near capacity have constant marginal costs to increase output. -Estimate marginal revenues and marginal costs and then set prices that allow you to sell all quantities for which marginal revenue is greater than marginal cost -Recipe for maximum profits is easiest to follow by fist looking at quantity decision, then price decision.
-Look in sequence at each quantity—first piercing, second piercing, and so on. For each quantity, compare marginal revenue and marginal cost. If marginal revenue is greater than marginal cost, produce. Total profits will increase, stop increasing quantity when marginal revenue less than marginal cost. -Once you choose (target) quantity with maximum profits, set highest possible price allowing you to sell target quantity. -Find all quantities for which marginal revenue is greater than marginal cost -Set the highest possible price that allows you to sell all quantities for which marginal revenue is greater than marginal cost. Price discrimination: Charging different customer different prices fro the same product/service -Smart strategy sets lower price for customers with elastic demand, and higher price for customers with inelastic demand. -Customers do no volunteer high willingness to pay. Clever price-discrimination strategies divide customers into elastic demanders (lower price) and inelastic demanders (higher price). -Price discrimination discounts for seniors and children are profitable because of more elastic demand, ability to prevent re-sale, and last f resentment from full-price customers. -Airlines and cell phone providers distinguish business from non-business customers, charging higher prices to business customers (inelastic demand), and lower price to non-business customers (elastic demand). -Price discrimination allows businesses to lower prices to attract price-sensitive customers (elastic demanders), without lowering prices for everyone else (inelastic demanders) Recipe for price Discrimination -Prevent resale of product/service -Charge lower price to elastic demand group -Charge higher price to inelastic demand group -Control resentment among higher price buyers -A price-discriminating business estimates marginal revenues and marginal costs or each separate group, then sets price allowing sale of all quantities where marginal revenue is grater than marginal cost.
-Look in sequence at each quantity—first piercing, second piercing, and so on. For each quantity, compare marginal revenue and marginal cost. If marginal revenue is greater than marginal cost, produce. Total profits will increase, stop increasing quantity when marginal revenue less than marginal cost. -Once you choose (target) quantity with maximum profits, set highest possible price allowing you to sell target quantity. -Find all quantities for which marginal revenue is greater than marginal cost -Set the highest possible price that allows you to sell all quantities for which marginal revenue is greater than marginal cost. Price discrimination: Charging different customer different prices fro the same product/service -Smart strategy sets lower price for customers with elastic demand, and higher price for customers with inelastic demand. -Customers do no volunteer high willingness to pay. Clever price-discrimination strategies divide customers into elastic demanders (lower price) and inelastic demanders (higher price). -Price discrimination discounts for seniors and children are profitable because of more elastic demand, ability to prevent re-sale, and last f resentment from full-price customers. -Airlines and cell phone providers distinguish business from non-business customers, charging higher prices to business customers (inelastic demand), and lower price to non-business customers (elastic demand). -Price discrimination allows businesses to lower prices to attract price-sensitive customers (elastic demanders), without lowering prices for everyone else (inelastic demanders) Recipe for price Discrimination -Prevent resale of product/service -Charge lower price to elastic demand group -Charge higher price to inelastic demand group -Control resentment among higher price buyers -A price-discriminating business estimates marginal revenues and marginal costs or each separate group, then sets price allowing sale of all quantities where marginal revenue is grater than marginal cost.
