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For individual firms, the price and quantity sold of a product determine the product’s revenue.

“Price derivation” is a general approach to determining price that is based on theoretical economic analysis.

“Cost-plus” is a general approach to determining price that is based on setting revenue goals.

Price theory assumes that a company’s main objective is to maximize its profits.

The supply side of price theory is concerned with revenue curves.

Fixed costs are those costs that do not vary with differences in output, while variable costs are those that change when the level of production is altered.

Profit maximization is achieved when marginal costs (the change in total cost that results from producing an additional unit of output) are equal to marginal revenues (the change in total revenue resulting from the production of an incremental unit).

A supply curve is the amount of a product that a firm is willing to produce.

The concept of elasticity helps explain why the demand and supply curves vary for the different types of market structure.

There are actually four types of elasticity: industry or market elasticity, company or brand elasticity, segment elasticity, and personal consumer elasticity.

A price cut will increase revenue if demand is inelastic, and a price increase will raise revenue if demand is elastic.

Even though price theory concepts are difficult to apply in practice and many businesspeople actually lack the formal training in economics needed to apply price theory to their pricing decisions, price theory (and its concerns about whether or not demand for a product is elastic or inelastic, and the type of market structure the product is operating in) is a good starting point for applying other pricing approaches.

The two most common cost-oriented pricing procedures are the full-cost method and the partial-cost method.

The full-cost method has two deficiencies: it does not consider the demand for the item or its competition, and it allocates variable costs in an arbitrary and unrealistic fashion.

The incremental-cost method allows for lower prices than the full-cost method.

Breakeven analysis is a price-setting method that determines the price that a good or service must be sold at in order to achieve a targeted level of profitability.

One of the weaknesses of break-even analysis is that it assumes that costs can be accurately divided into fixed and variable categories.

Preparing specifications for products usually requires the assistance of technical personnel such as engineers, designers, and chemists.

Where there is only one seller of a product needed by government or industry, the purchase terms are often arrived at by competitive bidding.

Transfer pricing is typically a very simple process, especially in the case of a large multinational corporation.

The term “price” refers to

Different types of market structures may have different schedules for

Which market structure exhibits the qualities of a large number of buyers and sellers, heterogeneous products, and geographical differentiation?

Which market structure exhibits the qualities of relatively few sellers and high start-up costs, resulting in barriers to entry?

Which market structure has one seller of a product with no close substitutes and frequent government regulation?

Economic approaches to pricing focus on the elements of

Marginal cost is the

A measure of the responsiveness of purchasers and suppliers to changes in price is referred to as

Toronto officials raise prices on subway tokens when they need more money for the city’s budget because they feel the demand for subway transportation is

If the price of gasoline were to increase significantly, demand in the short run would likely be ______________, whereas later it would likely be ____________.

The determinants of elasticity include

Demand curves

A major problem with cost-oriented price setting is that

The break-even point can be determined in terms of

Break-even analysis indicates that, when variable costs average $10 per unit, fixed costs are $50,000 in total, and the selling price is $20 per unit, then

The staff at Lauren Crawford Enterprises performs a break-even analysis and determines that the break-even point is 10,000 units or $50,000.  What else would you recommend that they consider before making a price decision based on this analysis?

Dynamic breakeven analysis combines the traditional break-even analysis model with

Competitive bidding

A profit centre

Major problems in pricing include determining