Chapter 17

Review and Applications
2.1 – Give an example of each major type of pricing objective.
The three pricing objectives in the text were profit-oriented pricing, sales-oriented pricing, and status quo pricing. An example of the profit-oriented pricing would be the target return on investment. This would be the net profit of a company after taxes are divided by total assets. Menards would be an example of a profit oriented company. An example of sales-oriented pricing would be market share. The sales-oriented pricing objectives are based on market share, which using the company’s product sales as a percentage of the total sales in that industry. An example of a sales oriented comapany would be a Costco or Walgreens. The status quo pricing would be maintaining the company’s existing price or changing the price to meet the competitor’s prices. An airline or gas station would be an example of a status quo princing company.

3.1 – Explain the role of supply and demand in determining price.
First the company would have to make a demand curve and a demand schedule. The lower the price the higher the demand. This would tell the company the quantity demanded at which price. The company would then have to create a supply curve and a supply schedule. The higher the price the higher the supply. This would tell them the quantity supplied at a certain price. When you combine the demand and supply curve you come up with an equilibrium price. This price would tell the company at price at which demand and supply are equal and when they would make the most profit.

3.2 – If a firm can raise its total revenue by raising its price, should it do so?
Yes, because it would be considered an inelastic demand, which means the increase in price does not significantly affect the demand for the product. If the company can raise the price on a product and consumers will still buy it they should. It would have to be a product that is already relatively inexpensive.

3.3 – Explain the concepts of elastic and inelastic demand? Why should managers understand these concepts?
Elastic demand happens when consumers buy more or less of a product when the price of that product changes. An increase in total revenue when the price falls indicates that the demand is elastic. Demand tends to be elastic if consumers can easily find substitutes. Inelastic demand happens when an increase in or decrease in the price of a product does not affect the demand for that product. An increase in total revenue when the price increases indicates that the demand is inelastic.

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