RevenueAnalysisAndPricingPolicies

Unit7

Unit7
Structure
7.1 7.2 7.3 7.4 7.5 7.6 7.7 Introduction Objective

RevenueAnalysisAndPricingPolicies

Meaninganddifferenttypesofrevenues Relationshipbetweenrevenueconceptsandpriceelasticityofdemand SelfAssessmentQuestions1 Pricingpolicies Objectivesofthepricepolicy Pricingmethods SelfAssessmentQuestions2 Summary TerminalQuestions AnswertoSAQsandTQs

7.1 Introduction
The awareness of both revenue and cost concepts are important to a managerial economist. Revenueandrevenuecurveslikethecostandcostcurvesexplainthepositionandthefunctioningof afirminthemarket.Whilecostsindicatetheexpensesofafirmrevenueindicatesthereceiptsofa firm.Revenuemeansthesalereceiptsoftheoutputproducedbythefirm.Itdependsonthemarket price. Elasticity of demand has an important bearing on the receipts of a firm. The amount of money, which the firm receives by the sale of its output in the market, is known as its revenue. Themajorobjectiveofafirmistomakemaximumprofit.Costandrevenueconceptshelp in the maximization of its profit under various kinds of markets like perfect, imperfect etc. The managementofafirmshouldformulateanappropriatepricingpolicykeepingthelongrunprospects inview,toattractmaximprofit.

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LearningObjectives: Afterstudyingthisunit,youshouldbeabletounderstandthefollowing

1. Establishthefirmproperlyinthemarket 2. Differentiatebetweendifferenttypesofrevenue 3. Understandtherelationshipbetweentotalrevenueandpriceelasticityofdemand 4. Knowdifferenttypesofpricingpractices 5. Statevariousguidelinesforsuccessfulpricingpolicy 6. Studyitsimpactonsocioeconomicconditionsoftheeconomy

7.2MeaningAndDifferentTypesOfRevenues
Revenue is the income received by the firm. There are three concepts of revenue Total revenue,AveragerevenueandMarginalrevenue 1.Totalrevenue(TR): Totalrevenuereferstothetotalamountofmoneythatthefirmreceivesfromthesaleof its products,i.e..grossrevenue.Inotherwords,itisthetotalsalesreceiptsearnedfromthesaleofits totaloutputproducedoveragivenperiodoftime.Inbrief,itreferstothetotalsalesproceeds.Itwill varywiththefirmsoutputandsales.Wemayshowtotalrevenueasafunctionofthetotalquantity soldatagivenpriceasbelow. TR=f(q).Itimpliesthathigherthesales,largerwouldbetheTRandviceversa.TRiscalculatedby multiplying the quantity sold by its price. Thus, TR = PXQ. For e.g. a firm sells 5000 units of a commodityattherateofRs.5perunit,thenTRwouldbe TR=PxQ=5x5000=25,000.00.

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TR

Price 0

Sales

2.Averagerevenue(AR) Averagerevenueistherevenueperunitofthecommoditysold.Itcanbeobtained bydividingtheTRbythenumberofunitssold.Then,AR=TR/QAR=150/15=10. When different units of a commodity are sold at the same price, in the market, average revenue equalspriceatwhichthecommodityissoldfore.g.2unitsaresoldattherateofRs.10perunit,then totalrevenuewouldbeRs.20(2x10).ThusAR=TR/Q20/2=10.Thusaveragerevenuemeans price.Sincethedemandcurveshowstherelationshipbetweenpriceandthequantitydemanded,it alsorepresentstheaveragerevenueorpriceatwhichthevariousamountsofacommodityaresold, becausethepriceofferedbythebuyeristherevenuefromsellerspointofview.Therefore,average revenuecurveofthefirmisthesameasdemandcurveoftheconsumer. Therefore, in economics we use AR and price as synonymous except in the context of price discriminationbytheseller.MathematicallyP=AR. 3.MarginalRevenue(MR) Marginalrevenueisthenetincreaseintotalrevenuerealizedfromsellingonemoreunitofaproduct. Itistheadditionalrevenueearnedbysellinganadditionalunitofoutputbytheseller. MRdiffersfromthepriceoftheproductbecauseittakesintoaccounttheeffectofchangesinprice. For example if afirm can sell10 unitsat Rs.20eachor 11unitsat Rs.19each, then the marginal revenuefromtheeleventhunitis(1020)(1119)=Rs.9. Ifthepriceofaproductfallswhenmoreofitisofferedforsalethenthatwouldinvolvealossonthe previousunitswhichweresoldatahigherpricebeforeandisnowsoldatthereducedpricealong

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withtheadditionalone.Thislossinthepreviousunitsmustbedeductedfromtherevenueearnedby theadditionalunit. Supposeafirmisselling4unitsoftheoutputatthepriceofRs.14perunit.Nowifitwantstosell5 unitsinsteadof4unitsandtherebythepriceoftheproductfallstoRs.12perunit,thenthemarginal

th revenuewillnotbeequaltoRs.12atwhichthe5 unitissold.4units,whichweresoldatthepriceof

Rs.14before,willallhavetobesoldatthereducedpriceofRs.12andthatwillmeanthelossof2 rupees on each of theprevious 4 units. The total loss on the previousunits will be equal to Rs.8.
th Therefore, this loss of 8 rupees should be deducted from the price of Rs.12 of the 5 unit while

calculatingthemarginalrevenue.Themarginalrevenueinthiscase,therefore,willbeRs.12Rs.8 =Rs.4andnotRs.12whichistheaveragerevenue. Marginal revenue can also be directly calculated by finding out the difference between the total revenuebeforeandaftersellingtheadditionalunitoftheproduct. Totalrevenuewhen4unitsaresoldatthepriceofRs.14=4X14=Rs.56 Totalrevenuewhen5unitsaresoldatthepriceofRs.12=5X12=Rs.60
th Therefore,Marginalrevenueorthenetrevenueearnedbythe5 unit=6056=Rs.4.

Thus,Marginalrevenueofthenthunit=differenceintotalrevenueinincreasingthesalefromn1to nunitsor Marginal revenue = price of nth unit minus loss in revenue on previous units resulting from price reduction. The concept is important in micro economics because a firm's optimal output (most profitable) is whereitsmarginalrevenueequalsitsmarginalcosti.e.aslongastheextrarevenuefromsellingone moreunitisgreaterthantheextracostofmakingit,itisprofitabletodoso. It is usual for marginal revenue to fall as output goes up both at the level of a firm and that of a market,becauselowerpricesareneededtoachievehighersalesordemandrespectively. DTR =where D TRrepresentschangeinTR DQ

MR=

And D Qindicateschangeintotalquantitysold. AlsoMR=TRnTRn1 Marginalrevenueisequaltothechangeintotalrevenueoverthechangeinquantity MarginalRevenue=(Changeintotalrevenue)dividedby(Changeinsales)

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Units 1 2 3 4 5

Price 20 18 16 14 12

TR 20 36 48 56 60

AR 20 18 16 14 12

MR 16 12 8 4

According to the table,people will notbuy morethan 4unitsata priceof Rs.14.00. Tosell more, pricemustdrop.Supposethattosell5units,thepricemustdroptoRs.12.Whatwillthemarginal revenueofthe5thunitbe? There isa temptation to answerthisquestion by replying, Rs.12. A little arithmetic showsthat this answerisincorrect.Totalrevenuewhen4aresoldisRs.56.When5unitsaresold,totalrevenueis (5)x(Rs.12)=Rs.60.Themarginalrevenueofthe5thunitisonlyRs.4. To see why the marginal revenue is less than price, one must understand the importance of the downwardsloping demand curve. To sell another unit, seller must lower price on all units. He receivedanextraRs.4forthe5thunit,butlostRs.8on4unitshewaspreviouslyselling.Sothenet increaseinrevenuewasRs.12minusRs.8orRs.4. There is another way to see why marginal revenue will be less than price when a demand curve slopesdownward.Priceisaveragerevenue.Ifthefirmsells4unitsfor Rs.14,theaveragerevenueforeachunitisRs.14.00.Butassellersellsmore,the averagerevenue(orprice)drops,andthiscanonlyhappenifthemarginalrevenueisbelowprice, pullingtheaveragedown. Ifoneknowsmarginalrevenue,onecantellwhathappenstototalrevenueifsaleschange.Ifselling another unit increases total revenue, the marginal revenue must be greater than zero. If marginal revenue is less than zero, then selling another unit takes away from total revenue. If marginal revenueiszero,thansellinganotherdoesnotchangetotalrevenue.Thisrelationshipexistsbecause marginalrevenuemeasurestheslopeofthetotalrevenuecurve.

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RelationshipbetweenTotalrevenue,AveragerevenueandMarginalRevenueconcepts In order to understand the relationship between TR, AR and MR, we can prepare a hypothetical revenueschedule.

NumberofUnitssold 1 2 3 4 5 6 7

TR(Rs.) 10 18 24 28 30 30 28

AR(Rs.) 10 9 8 7 6 5 4

MR(Rs.) 8 6 4 2 0 2

Fromthetable,itisclearthat:

1. MRfallsasmoreunitsaresold. 2. TRincreasesasmoreunitsaresoldbutatadiminishingrate. 3. TRisthehighestwhenMRiszero 4. TRfallswhenMRbecomenegative 5. ARandMRbothfalls,butfallinMRisgreaterthanARi.e.,MRfallsmoresteeplythanAR.

RelationshipbetweenARandMRandthenatureofARandMRcurvesunderdifference marketconditions 1.UnderPerfectMarket Underperfectcompetition,anindividualfirmbyitsownactioncannotinfluencethemarketprice.The marketpriceisdeterminedbytheinteractionbetweendemandandsupplyforces. Afirmcansell any amount of goods at the existing marketprices. Hence,the TR ofthefirm would increase

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proportionatelywiththeoutputofferedforsale.Whenthetotalrevenueincreasesindirectproportion tothesaleofoutput,theARwouldremainconstant.Sincethemarketpriceofitisconstantwithout any variation due to changes in the units sold by the individual firm, the extra output would fetch proportionateincreaseintherevenue.Hence,MR&ARwillbeequaltoeachotherandremain constant. Thiswillbeequaltoprice.

NumberofUnitssold

PriceperUnitRs.8.00 AR TR 8 8 8 8 8 8 8 16 24 32 40 48 MR 8 8 8 8 8 8

1 2 3 4 5 6
Y

Price

AR=MR=Price

X 0

Output

Underperfectmarketcondition,theARcurvewillbeahorizontalstraightlineandparalleltoOXaxis. Thisisbecauseafirmhastosellitsproductattheconstantexistingmarketprice.TheMRcurealso coincideswiththeARcurve.Thisisbecauseadditionalunitsaresoldatthesameconstantpricein themarket.

Hence,AR=MR=Price

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2.UnderImperfectMarket Underallformsofimperfectmarkets,therelationbetweenTR,AR,andMRisdifferent.Thiscanbe understoodwiththehelpofthefollowingimaginaryrevenueschedule. NumberofUnitssold TR ARorpricein Rs. 1 2 3 4 5 6 7 10 18 24 28 30 30 28 10 9 8 7 6 5 4 10 8 6 4 2 0 2 MR

Fromtheabovetableitisclearthat: Inordertoincreasethesales,afirmisreducingitsprice,henceARfalls.

1. Asaresultoffallinprice,TRincreasebutatadiminishingrate. 2. TRwillbehigherwhenMRiszero 3. TRfallswhenMRbecomesnegative 4. ARandMRbothdeclines.ButfallinMRwillbegreaterthanthefallinAR. 5. TherelationshipbetweenARandMRcurvesisdeterminedbytheelasticityofdemandonthe

averagerevenuecurve.
Y

REVENUE
AR

MR X 0 SikkimManipalUniversity

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Underimperfectmarket,theARcurveofanindividualfirmslopedownwardsfromlefttoright. Thisisbecauseafirmcanselllargerquantitiesonlywhenitreducestheprice.Hence,ARcurve hasanegativeslope. TheMRcurveissimilartothatoftheARcurve.ButMRislessthanAR.ARandMRcurvesare different.GenerallyMRcurveliesbelowtheARcurve. TheARcurveofthefirmorthesellerandthedemandcurveofthebuyeristhesame Since,thedemandcurverepresentsgraphicallythequantitiesdemandedbythebuyersatvarious pricesitshowstheARatwhichthevariousamountsofthegoodsthataresoldbytheseller.Thisis becausethepricepaidbythebuyeristherevenuefortheseller(Onemansexpenditureisanother mansincome).Hence,theARcurveofthefirmisthesamethingasthatofthedemandcurveofthe consumers.
Y

Price

5
AR/D

0 10

Quantity
Suppose,aconsumerbuys10unitsofaproductwhenthepriceperunitisRs.5perunit.Hence,the totalexpenditureis10x5=Rs.50/.Thesellerisselling10unitsattherateofRs.5perunit.Hence, histotalincomeis10x5=Rs.50/.Thus,itisclearthatARcurveanddemandcurveisreallyone andthesame.

7.3.RelationshipBetweenRevenueConceptsAndPriceElasticityOfDemand
ElasticityofDemand,AverageRevenueandMarginalRevenue Thereisaveryusefulrelationshipbetweenelasticityofdemand,averagerevenueandmarginal revenueatanylevelofoutput.Elasticityofdemandatanypointonaconsumersdemandcurveis thesamethingastheelasticityonthegivenpointonthefirmsaveragerevenuecurve.Withthehelp

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ofthepointelasticityofdemand,wecanstudytherelationshipbetweenaveragerevenue,marginal revenueandelasticityofdemandatanylevelofoutput.

Y t

Price

R K

Q 0 Output AR M MR T X

InthediagramARandMRrespectivelyaretheaveragerevenueandthemarginalrevenuecurves. ElasticityofdemandatpointRontheaveragerevenuecurve=RT/RtNowinthetrianglesPtR andMRT tPR=RMT(rightangles) tRP=RTM(correspondingangles) PtR=MRT(beingthethirdangle) Therefore,trianglesPtRandMRTareequiangular. HenceRT/Rt=RM/tP InthetrianglesPtKandKRQ PK=RK PKt=RKQ(verticallyopposite) tPK=KRQ(rightangles) Therefore,trianglesPtKandRQKarecongruent(i.e.,equalinallrespects). HencePt=RQ ElasticityatR=RT/Rt=RM/tP=RM/RQ ItisclearfromthediagramthatRMRM = RQRMQM

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HenceelasticityatR=RM/RMQM ItisalsoclearfromthediagramthatRMisaveragerevenueandQMisthemarginalrevenueatthe outputOMwhichcorrespondstothepointRontheaveragerevenuecurve.ThereforeelasticityatR =AverageRevenue/AverageRevenueMarginalRevenue IfAstandsforAverageRevenue,MstandsforMarginalRevenueandestandsforpointelasticityon theaveragerevenuecurveThene=A/AM. Thus,elasticityofdemandisequaltoARoverARminusMR. Byusingtheaboveelasticityformula,wecanderivetheformulaforARandMRseparately. A e= AM eAeM=AbringingAstogether,wehave eAA=eM A(e1)=eM A=eM/e1 A=M(e/e1) ThereforeAverageRevenueorprice=M(e/e 1) Thustheprice(i.e.,AR)perunitisequaltomarginalrevenuexelasticityoverelasticityminusone. Themarginalrevenueformulacanbewrittenstraightawayas M=A((e1)/e) Thegeneralrulethereforeis:atanyoutput, AverageRevenue=MarginalRevenuex(e/e1)and MarginalRevenue=AverageRevenuex(e1/e) Where,estandsforpointelasticityofdemandontheaveragerevenuecurve. Withthehelpoftheseformulae,wecanfindmarginalrevenueatanypointfromaveragerevenueat the same point, provided we know the point elasticity of demand on the average revenue curve. SupposethatthepriceofaproductisRs.8andtheelasticityis4atthatprice.Marginalrevenuewill be: M=A((e1)/e) =8((41/4) Thiscanbechangedinto(throughcrossmultiplication)

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=8x3/4 =24/4 =6.MarginalRevenueisRs.6. SupposethatthepriceofaproductisRs.4andtheelasticitycoefficientis1thenthecorresponding MRwillbe: M=A((e1)/e) =4((41)/4) =4x3/4 =12/4 =3MarginalrevenueisRs.3 SupposethatthepriceofcommodityisRs.10andtheelasticitycoefficientatthatpriceis1MRwill be: M=A((e1)/e) =10((11)/1) =10x0/1 =0 Wheneverelasticityofdemandisunity,marginalrevenuewillbezero,whateverbetheprice(orAR). Itfollowsfromthisthatifademandcurveshowsunitaryelasticitythroughoutitslengththe correspondingmarginalrevenuewillbezerothroughout,thatis,thexaxisitselfwillbethemarginal revenuecurve. Thus, the higher the elasticity coefficient, the closer is the MR to AR / price. When elasticity coefficient is one for any given price, the corresponding marginal revenue will be zero, marginal revenueisalwayspositivewhentheelasticitycoefficientisgreaterthanoneandmarginalrevenueis alwaysnegativewhentheelasticitycoefficientislessthanone.

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KinkedDemandcurveandthecorrespondingMarginalRevenuecurve

10 9 8 7 6 Price 5

G 4 3 2 1 0 L D

100 200 Output

300400

WemeasurequantityonthexaxisandpriceontheYaxis.ThedemandcurveADhasakinkatpoint B,thusexhibitingtwodifferentcharacteristics.FromAtoBitiselasticbutfromBtoDitisinelastic. BecausethedemandiselasticfromAtoBaverysmallfallinpricecausesaverybigriseindemand, buttorealizethesameincreaseindemandaverybigfallinpriceisrequiredasthedemandcurve assumes inelastic shape after point B. The corresponding marginal revenue curve initially falls smoothly,thoughatagreaterrate.Howeverasthetableshowsandthediagramclearlyillustrates, thereisasuddenfallfromRs.600toRs.50thento50.InthediagramthereisagapinMRbetween output 300and 350.Generallyan Oligopolist whofaces a kinked demand curve will makea good gainwhenhereducesthepricealittlebeforethekink(pointB),butifhelowersthepricebelowB therivalfirmswilllowertheirpricestooaccordinglythepricecuttingfirmwillnotbeabletoincrease its sales correspondingly or may not be able to increase its sales at all. As a result, the demand curveofpricecuttingfirmbelowBismoreinelastic.ThecorrespondingMRcurveisnotsmoothbut hasagapordiscontinuitybetweenGandL.

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In certain cases, the kinked demand curve may show a high elasticity in the lower portion of the demand curvebeyondthe kink and low elasticity inhigherportion of thedemand curve before the kinkMarginalrevenuetosuchademandcurvewillshowagapbut Insteadofatalowerlevel,itwillstartatahigherlevel.
Y P E>1 TR H

Price

E=1 C E<1

AR 0 Output Q D X

RelationshipbetweenAR,MR,TRandElasticityofDemand InthediagramARistheaveragerevenuecurve,MRisthemarginalrevenuecurveandODisthe totalrevenuecurve.AtthemiddlepointCofaveragerevenuecurveelasticityisequaltoone.Onits lowerhalfitislessthanoneandontheupperhalfitisgreaterthanone.MRcorrespondingtothe middlepointCoftheARcurveiszero.ThisisshownbythefactthatMRcurvecutsthexaxisatQ which corresponds to the point C on the AR curve. If the quantity is greater than OQ it will correspond to that portion of the AR curve where e<1 marginal revenue is negative because MR goes below the x axis. Likewise for a quantity less than OQ, e>1 and the marginal revenue is positive.ThismeansthatifquantitygreaterthanOQissold,thetotalrevenuewillbediminishingand foraquantitylessthanOQthetotalrevenueTRwillbeincreasing.ThusthetotalrevenueTRwillbe maximumatthepointHwhereelasticityisequaltooneandmarginalrevenueiszero. SignificanceofRevenuecurves The relationship between price elasticity of demand and total revenue is important because every firm has to decide whether to increase or decrease the price depending on the price elasticity of demandoftheproduct.Ifthepriceelasticityofdemandforhisproductisrelativelyelasticitwillbe

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advantageous to reduce price as it increases his total revenue. On the other hand, if the price elasticityofdemandforhisproductisrelativelyinelasticheshouldraisethepriceasitincreaseshis totalrevenue. Averagerevenue,whichisthepriceperunit,consideredalongwithaveragecostwillshowtothefirm whetheritisprofitabletoproduceandsell.Ifaveragerevenueisgreaterthanaveragecost,thefirm isgettingexcessprofitifitislessthanaveragecost,thefirmisrunningataloss. FirmsprofitismaximumatapointwhereMarginalrevenueisequaltoMarginalcost.Anyincrease inoutputbeyondthatpointwillmeanlossonadditionalunitsproducedrestrictionofoutputbefore thatpointwillmeanlowerprofit.Thustheconceptofaveragerevenueisrelevanttofindoutwhether thefirmisrunningonprofitorlosstheconceptofmarginalrevenuetogetherwithmarginalcostwill showprofitmaximizingoutputforthefirm. SelfAssessmentQuestions1 1.____________isthetotalincomerealizedfromthesaleofitsoutputataprice. 2.TR/Q=___________________. 3.Additionalrevenueearnedbysellinganadditionalunitofoutputiscalled________. 4.ARcurvecoincideswiththeMRcurveandrunparalleltoOXaxisunder________competition. 5.ARandMRcurvesslopedownwardsunderconditionof__________competition.

7.4.PricingPolicies
A detailed study of the market structure gives us information about the way in which prices are determinedunderdifferentmarketconditions.However,inreality,afirmadoptsdifferentpoliciesand methodstofixthepriceofitsproducts. Pricingpolicyreferstothepolicyofsettingthepriceof theproductorproductsandservicesbythemanagementaftertakingintoaccountofvarious internal and external factors, forces and its own business objectives. Pricing Policy basically dependsonpricetheorythatisthecornerstoneofeconomictheory. Pricingisconsideredasoneof thebasicandcentralproblemsofeconomictheoryinamoderneconomy.Fixingpricesarethemost important aspect of managerial decision making because market price charged by the company affects the present and future production plans, pattern of distribution, nature of marketing etc. Aboveall,thesalesrevenueandprofitratiooftheproducerdirectlydependupontheprices.Hence, afirmhastochargethemostappropriatepricetothecustomers.Charginganidealprice,whichis

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neither too high nor too low, would depend on a number of factors and forces. There are no standard formulas or equations in economics to fix the best possible price for a product. The dynamic nature of the economyforcesafirm toraise and reduce thepricescontinuously. Hence, pricesfluctuateoveraperiodoftime. Generally speaking, in economic theory, we take into account of only two parties, i.e., buyers and sellers while fixing the prices. However, in practice many parties are associated with pricing of a product.Theyarerivalcompetitors,potentialrivals,middlemen,wholesalers,retailers,commission agentsandabovealltheGovt.Hence,weshouldgivedueconsiderationtotheinfluenceexertedby thesepartiesintheprocessofpricedetermination. Broadlyspeaking,thevariousfactorsandforcesthataffectthepricearedividedintotwocategories. Theyareasfollows: IExternalFactors(Outsidefactors) 1. Demand,supplyandtheirdeterminants. 2. Elasticityofdemandandsupply. 3. Degreeofcompetitioninthemarket. 4. Sizeofthemarket. 5. Goodwill,name,fameandreputationofafirminthemarket. 6. Trendsinthemarket. 7. Purchasingpowerofthebuyers. 8. Bargainingpowerofcustomers 9. Buyersbehaviorinrespectofparticularproduct 10. Availabilityofsubstitutesandcomplements. 11. Governmentspolicyrelatingtovariouskindsofincentives,disincentives,controls,restrictions andregulations,licensing,taxation,export&import,foreignaid,foreigncapital,foreign technology,MNCsetc. 12. Competitorspricingpolicy.

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13. Socialconsideration. 14. Bargainingpowerofcustomers.

II. InternalFactors(InsideFactors) 1. Objectivesofthefirm. 2. ProductionCosts. 3. Qualityoftheproductanditscharacteristics. 4. Scaleofproduction. 5. Efficientmanagementofresources. 6. Policytowardspercentageofprofitsanddividenddistribution. 7. Advertisingandsalespromotionpolicies. 8. Wagepolicyandsalesturnoverpolicyetc. 9. Thestagesoftheproductontheproductlifecycle. 10. Usepatternoftheproduct. 11. Extentofthedistinctivenessoftheproductandextentofproductdifferentiationpracticedbythe firm. 12. Compositionoftheproductandlifeofthefirm. Thus,multiplefactorsandforcesaffectthepricingpolicyofafirm

7.5ObjectivesOfThePricePolicy
Afirmhasmultipleobjectivestoday.Inspiteofseveralobjectives,theultimateaimofeverybusiness concernistomaximizeitsprofits.Thisispossiblewhenthereturnsexceedcosts.Inthiscontext, setting an ideal price for a product assumes greater importance. Pricing objectives has to be establishedbytop management to ensure notonly that the companysprofitability is adequate but also that pricing is complementary to the total strategy of the organization. While formulating the pricing policy, a firm has to consider various economic, social, political and other factors. The followingobjectivesaretobeconsideredwhilefixingthepricesoftheproduct.

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1. Profitmaximizationintheshortterm The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achievethisobjectiveshouldbeformulatedinsuchawayastomaximizethesalesrevenueand profit.Maximumprofitreferstothehighestpossibleofprofit. Intheshortrun,afirmnotonly shouldbeabletorecoveritstotalcosts,butalsoshouldgetexcessrevenueovercosts.Thiswill build the morale of the firm and instill the spirit of confidence in its operations. It may follow skimmingpricepolicy,i.e.,chargingaveryhighpricewhentheproductislaunchedtocatertothe needsofonlyafewsectionsofpeople.Itmayexploitwideopportunitiesinthebeginning.Butit may prove fatal in the long run. It may lose its customers and business in the market. Alternatively,itmayadoptpenetrationpricingpolicyi.e.,chargingarelativelylowerpriceinthe latterstagesinthelongrunsoastoattractmorecustomersandcapturethemarket. 2. Profitoptimizationinthelongrun Thetraditionalprofitmaximizationhypothesismaynotprovebeneficialinthelongrun.Withthe solemotiveofprofitmakingafirmmayresorttoseveralkindsofunethicalpracticeslikecharging exorbitantprices,followMonopolyTradePractices(MTP),RestrictiveTradePractices(RTP)and UnfairTradePractices(UTP)etc.Thismayleadtooppositionfromthepeople.Inordertoover come these evils, a firm instead of profit maximization, aims at profit optimization. Optimum profit refers to the most ideal or desirable level of profit. Hence, earning the most reasonableoroptimumprofithasbecomeapartandparcelofasoundpricingpolicyofafirmin recentyears. 3. PriceStabilization Pricestabilizationoveraperiodoftimeisanotherobjective.Thepricesasfaraspossibleshould notfluctuatetoooften.Priceinstabilitycreatesuncertainatmosphereinbusinesscircles.Sales planbecomesdifficultundersuchcircumstances.Hence,pricestabilityisoneoftheprerequisite conditions for steady and persistent growth of a firm. A stable price policy only can win the confidenceofcustomersandmayaddtothegoodwilloftheconcern.Itbuildsupthereputation andimageofthefirm. 4. Facingcompetitivesituation Oneoftheobjectivesofthepricingpolicyistofacethecompetitivesituationsinthemarket.In manycases,thispolicyhasbeenmerelyinfluencedbythemarketsharepsychology.Wherever companies are aware of specific competitive products, they try to match the prices of their

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productswiththoseoftheirrivalstoexpandthevolumeoftheirbusiness.Mostofthefirmsare notmerelyinterestedinmeetingcompetitionbutarekeentopreventit.Hence,afirmisalways busywithitscounterbusinessstrategy. 5. Maintenanceofmarketshare Marketsharereferstotheshareofafirmssalesofaparticularproductinthetotalsales ofallfirmsinthemarket. Theeconomicstrengthandsuccessofafirmismeasuredintermsof its market share. In a competitive world, each firm makes a successful attempt to expand its market share. If it is impossible, it has to maintain its existing market share. Any decline in marketshareisasymptomofthepoorperformanceofafirm.Hence,thepricingpolicyhasto assistafirmtomaintainitsmarketshareatanycost. 6. CapturingtheMarket Anotherobjectiveinrecentyearsistocapturethemarket,dominatethemarket,commandand controlthemarketinthelongrun.Inordertoachievethisgoal,sometimesthefirmfixesalower priceforitsproductandatothertimesevenitmaysellatalossintheshortterm.Itmayprove beneficialinthelongrun.Suchapricingisgenerallyfollowedinpricesensitivemarkets. 7. Entryintonewmarkets. Apartfromgrowth,marketshareexpansion,diversificationinitsactivitiesafirmmakesaspecial attempttoenterintonewmarkets.Entryintonewmarketsspeaksaboutthesuccessfulstoryof thefirm.Consequently,ithastobearthepioneeringandsubsequentrisksanduncertainties.The pricesetbyafirmhastobesoattractivethatthebuyersinothermarketshavetoswitchontothe productsofthecandidatefirm. 8. Deeperpenetrationofthemarket The pricing policy has to be designed in such amanner that afirm can make inroads into the marketwithminimumdifficulties.Deeperpenetrationisthefirststepinthedirectionofcapturing anddominatingthemarketinthelatterstages. 9. Achievingatargetreturn Apredeterminedtargetreturnoncapitalinvestmentandsalesturnoverisanotherlongrunpricing objectiveofafirm.Thetargetsaresetaccordingtothepositionofindividualfirm.Hence,prices oftheproductsaresocalculatedastoearnthetargetreturnoncostofproduction,salesand capitalinvestment.Differenttargetreturnsmaybefixedfordifferentproductsorbrandsor marketsbutsuchreturnsshouldberelatedtoasingleoverallrateofreturntarget.

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10. Targetprofitontheentireproductlineirrespectiveofprofitlevelofindividualproducts. Thepricesetbyafirmshouldincreasethesaleofalltheproductsratherthanyieldaprofiton oneproductonly.Arationalpricingpolicyshouldalwayskeepinviewtheentireproductlineand maximumtotalsalesrevenuefromthesaleofallproducts.Aproductlinemaybedefinedasa group of products which have similar physical features and perform generally similar functions. In a product line, a few products are regarded as less profit earning products and othersareconsideredasmoreprofitearning.Hence,aproperbalanceinpricingisrequired. 11. Longrunwelfareofthefirm Afirm has multiple objectives. They are laiddown on thebasisof pastexperience andfuture expectations.Simultaneousachievementofallobjectivesarenecessaryfortheoverallgrowthof afirm.Objectiveofthepricingpolicyhastobedesignedinsuchawayastofulfillthelongrun interestsofthefirmkeepinginternalconditionsandexternalenvironmentinmind. 12. Abilitytopay Pricing decisions are sometimes taken on thebasis of the ability to pay of the customers, i.e., higherpricecanbechargedtothosewhocanaffordtopay.Suchapolicyisgenerallyfollowed bythosepeoplewhosupplydifferenttypesofservicestotheircustomers. 13. EthicalPricing Basically,pricingpolicyshouldbebasedoncertainethicalprinciples.Businesswithoutethicsis asin.Whilesettingtheprices,somemoralstandardsaretobefollowed.Althoughprofitisone ofthemostimportantobjectives,afirmcannotearnitinamoralvacuum.Insteadofsqueezing customer,afirmhastochargemoderatepricesforitsproducts.Thepricingpolicyhastosecure reasonableamountofprofitstoafirmtopreservetheinterestsofthecommunityandpromoteits welfare. Besidesthesegoals,therearevariousotherobjectivessuchaspromotionofnewitems,steady workingofplants,maintenanceofcomfortableliquidityposition,makingquickmoney,maintaining regularincometothecompany,continuedsurvival,rapidgrowthofthefirmetcwhichfirmsmay setwhiletakingpricingdecisions.

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7.6 PricingMethods
Thetraditionaltheoryofvalueandpricingpoliciesetc.,provideatheoreticalbasetothemanagement totakedecisiononsettingtherightprice.Theactualpricingofproductsdependuponvariousfactors andconsiderations.Hencethereareseveralmethodsofpricing. 1.FullCostpricingorCostPlusPricingMethod Full costpricing isoneof the simplestand common methodsofpricingadopted bydifferentfirms. HallandHitchoftheOxfordUniversityintheirempiricalstudyofactualbusinessbehaviorfoundthat business firms do not determine price and output by comparing MR and MC. On the other hand, under Oligopoly and monopolistic conditions they base their market price on full cost conditions. According to this principle, businessmen charge price that cover their average cost in which are includednormalorconventionalprofits.Costreferstofullallocatedcosts.AccordingtoJoelDean,it hasthreecomponents i. Actual cost which refers to the actual or total expenses incurred in production. For e.g., wage bills,rawmaterialcost,overheadchargesetc. ii. Expectedcostreferstotheforecastforthepricingperiodonthebasisofexpectedprices,output rateandproductivity. iii. Standardcostreferstocostincurredatthenormallevelofoutput. Inbrief,afirmcomputesthesellingpriceofitsproductbyaddingcertainpercentagetothe averagetotalcostoftheproduct.Thepercentageaddedtocostsiscalledasmarginormarkups. Hence,thismethodisalsocalledasMarginpricingandMarkuppricing. Cost+pricing=Cost+ Fairprofit Fair profit means a fixed percentage of profit markups. It is arbitrarily determined. The margin of profitsincludedinthepriceofaproductdiffersfromindustrytoindustryandcommoditytocommodity on account of differences in competitive strength, cost of production, total turnover, accounting practicesetc.Pasttraditions,directivesfromtradeassociations,guidelinesfromthegovernmentmay alsodecidethepercentageofprofits. ThismethodenvisagescoveringthetotalcostsincurredinproducingandsellingacommodityInthis casebusinessmendonotseeksupernormalprofit.Hence,apricebasedonfullaveragecostisthe

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right cost, the one which ought tobe chargedbased onthe idea offairness under Oligopoly and Monopolisticcompetition. Illustration Production=8000units. TotalFixedCost=Rs30,000 TotalVariableCost=Rs50,000 TotalCost=Rs80,000 PerUnitCost=80,000/8000=Rs10 20%NetProfitMargin OnCost= CostPrice=

20 x10=Rs2 100
Rs10

20%NPMonCost =Rs2 SellingPrice=Rs12 Evaluationofthefullcostpricing Generally, the firms will not have information about demand conditions, nature and degree of competition, technology used etc., further modern business conditions are extremely uncertain. Besidesafirmmaybeproducingorsellinginnumerablevarietiesofgoodsandtocalculatepriceson thebasisofprofitmaximizationmaybealmostimpossible.Thecostplusmethodisconvenientsince thefirmshaveonlytoaddsomestandardmarkuptotheircost.Overaperiodoftime,throughtrial and error, they can find out the proper mark up. The supreme merit of this method lies in its mechanicalsimplicityanditsapparentfairness. It is safer, cheaperand imparts competitive stability particularly when there is tough competition in themarket.Itisusefulparticularlyinproducttailoringandpublicutilitypricing.Itisjustifiedonmoral groundsbecausepricebasedoncostsisajustprice. AccordingtoProfessorJoelDean,itisthebestmethodofpricingincaseofnewproductsbecauseif thefirmisabletorealizeitsnormalprofits,thenonlyitcantakeadecisiontoproduceandmarketa productotherwisenot. Thismethodattachestoomuchofsignificancetoallottedcostsandmarkups Ittendstodiminishtheinterestoftheproducerincostcontrol However,manyfirmsadoptthismethodofpricingduetoitsinherentbenefits.

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2.RateofReturnPricing Rateofreturnpricingisamodifiedformoffullcostpricing.Underthismethod,aproducerdecides apredeterminedtargetrateofreturnoncapitalinvested.Fullcostpricingconsidersthemark upsorprofitarbitrarily.Insteadofsettingthepercentagearbitrarilyafirmwilldeterminetheaverage mark up on costs necessary to produce a desired rate of return on the companys investments. Thus,under this method,price is determinedalong aplanned rateof returnon investment. In this case, a companyestimatesfuture sales,future costsandarriveata markup that will achievea targetreturnonacompanysinvestment. ProfessorDaviesandHughesintheirbook,ManagerialEconomicshaveusedthefollowingformula tocalculatethedesiredrateofreturnwhenamarkupisappliedoncost. Capitalemployed Percentagemarkup=xPlannedrateofreturn Totalannualcost LetussupposethatthecapitalemployedbyafirmisRs.16lacksandthetotalcostisRs.12lacks withaplannedrateofreturnof30percent.Bymakinguseoftheaboveformula,wecanfindoutthe percentagemarkupofthefirminthefollowingway. Capitalemployed16 xplannedrateofreturn=x30=40%. Totalannualcost Illustration: Production=10,000units TotalCost=4,00,000 PerUnitCost=4,00,000/10,000=Rs40 30%ofRs40is 30x40=Rs12 100 Now,ifthetotalcostperunitis=40 30%markup =12 Thesellingpricewouldbe=52 12

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Themarkupisthuscarefullyplannedandcalculated,asdifferentfromthearbitrarypercentageused inthecostpluspricing.

Price=Totalcostperunit+Markup.
Themanagementwillregardthispriceasthebasepriceapplicableoveraperiodoftime.However, when cost of production changes as a result of changes in the prices of raw materials or due to changesinthelevelsofwages,themanagementcanchangethepricesuitably.Besides,thebase price can be modified suitably according to changes in demand and competitive conditions in the market. Evaluationofrateofreturnpricing Asitisarefinedversionofcostpluspricingitissuperiortocostpluspricingintwoways: i. Theanalysisisbasedonstandardcostwhichiscomputedonthebasisofnormaloutputand ii. Theprofitmarkupisbasedonaplannedrateofreturnoninvestmentandnotonanyarbitrary figure. As it is a refined form of cost plus pricing method all the merits and demerits of cost plus pricing methodapplytorateofreturnpricingtoo. 3.GoingRatePricing. Going rate pricing is theoppositeoffull cost pricing. In this method, emphasis isgivenon market conditions rather than on costs. Generally, we come across this method ofpricing under oligopoly marketespeciallyunderpriceleadership.Underthismethod,afirm,fixitspriceaccordingtothe pricefixedbytheleader.Afirmhasmonopolypowerovertheproductitproducesandcancharge itsownpriceandfacealltheconsequencesofmonopoly.However,afirmchoosesthepricewhich isgoinginthemarketandchargeaparticularpricethattheotherfollowersarecharging. Thistypeofpricingisnotthesameasacceptingapricesetinaperfectlycompetitivemarket.Afirm hassomepowertofixthepricebutinsteadofdoingso,itadjustsitsownpricetothegeneralprice structure in the industry. Hence this method of pricing is known as acceptance pricing. Normally underthismethod,theindustrytriestodeterminethelowestpricesthatthesellersorfollowerscan affordtoacceptconsideringvariousalternatives. The price follower, however compare the price of the leader and his cost, revenue conditions and long run profitability. As small firms recognize the big firm as their leader, they try to imitate their

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leaderinpricingdecisions.Sinceapriceleaderisafirmwithasuccessfulprofithistory,significant marketshareandlongexperienceinmarketmatters,theimitatingfirmsfollowtheleaderinthehope ofearninglargerprofitsundertheshelteroftheleaderspriceumbrella. Imitation is the easy way of decision making. The follower uses another firms market analysis without worrying himself about demand and cost estimate. Many executives desire to devote minimumtimeforpricingdecisionandhencetheyfollowthismethod. Thispolicyisnotconfinedtoonlysmallbusinessfirms.Evenlargefirmsfollowapricesetbyaprice leaderorbythemarket.Somefirmsadjusttheircoststoapredeterminedpricebykeepingtheircosts withinthepercentagelimitsoftheirsellingpricesinordertoachievethetargetedprofit.Thispolicy suits to those products which have reached a mature stage and where both customers and rivals havecometoacceptastableprice.Thegoingratepricingisgenerallyadoptedi.whencostsare difficulttomeasureii.Andthefirmwantstoavoidtensionofpricerivalryinthemarketoriii.When thereispriceleadershipofadominantfirminthemarket. This method of pricing is easy to adopt, economical and rational. It helps in avoiding cutthroat competitionamongfirms. Imitation Pricing It is a variant of going rate pricing. The firms which join the industry late just imitatethepricefixedbytheleader.Thisisthesameasgoingratepricing. 4.Administeredprices ThetermadministeredpriceswasintroducedbyKeynesforthepriceschargedbyamonopolistand thereforedeterminedbyconsiderationsotherthanmarginalcost.Amonopolistbeingapricemaker consciouslyadministersthepriceofhisproduct. IndianeconomistslikeL.K.JhaandMalcolmAdiseshaiahhave,however,aslightlydifferent conceptionaboutadministeredprices.AccordingtotheIndianeconomists,anadministered priceforacommodityistheonewhichisdecidedandarbitrarilyfixedbythegovernment.Itis notallowedtobedeterminedbythefreeplayofmarketforcesofdemandandsupply.Inshort, administeredpricesarethepriceswhicharefixedandenforcedbythegovernmentinthe overallinterestoftheeconomy. Administeredpricesarefixedbythegovernmentforafewcarefullyselectedgoodslikesteel,coal, aluminum,fertilizers,petroleum,cookinggasetc.,theseproductsaretherawmaterialsforother

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industriesandassuchthereisgreatneedforestablishingandstabilizingthetotaloutputandtheir prices.Thepublicdistributionsystemisalsosubjecttoadministeredprices. Administeredpricesarenormallysetonthebasisofcostplusastipulatedmarginofprofit.They representapoolpricewheretheindividualproducingunitsarebeinggrantedretentionprices.These retentionpricesmayeitherbeuniformordifferentfordifferentunits.Ascostofproductionchanges, administeredpricesalsowouldbemodified.Thisistherightmethodofpricingandbasedonlogical considerations Characteristics: Theyarefixedbythegovernment. Theyarestatutoryinform. Theyareregulatoryinnature. Theyaremeantascorrectivemeasures. Theyaretheoutcomeofthepricingpolicyofthegovernment.

Objectives:

1. Toprotecttheinterestsofweakersectionsagainsthighprices. 2. Tocurborencouragetheconsumptionofcertaincommodities. 3. Tocontaininflationandensurepricestability. 4. Tocounterstagflationandtheconsequentrecession. 5. Tomobilizerevenueforthegovernment 6. Toensureefficientallocationofresourcesamongdifferentusers. 7. Toimprovelivingstandardsofthemassesandpromotetheireconomicwelfare. 8. Toensureequitabledistributionofcertaingoodswhicharescarceinsupply. 9. Toachievemacroeconomicgoalslikewelfare,equityandstability.

NeedforAdministeredPrices:

1. Tocorrectimperfectionsinpricemechanisminafreeenterpriseeconomy. 2. Topreventpriceescalationofessentialcommoditieswhentheirsupplyfallsshortofdemand. 3. Toprotecttheinterestsofconsumersagainstprofitgreedymonopolists. 4. To provide certain necessaries of life at least in minimum quantities at fair prices to poorer
sectionsofthesociety
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Generally speaking thereexists agap betweenadministered prices and rise in cost ofproduction. Due to the dynamic nature of the economy, cost of production rises quickly. On the contrary on account of slow and sluggish actions of the government, the administered prices do not rise in commensuratewithriseincostofproduction.Manyatimeschangeinpricemaybeintroducedmuch laterthan costescalation. Consequently, the contention of the manufacturers under this method of pricingistheincreasesgrantedtothemareveryofteninadequatetocovertheriseincosts.Again, animportantproblemcentersaroundfixedcostswhicharenotadequatelycompensated,sincesuch priceincreasesareconsideredonlyonceinthreetofouryears,whenthebasicpriceisreviewed. Astheadministeredpricesareofteninadequatetomeetcostescalation,certainbasicindustrieslike fertilizers, cement, steel, etc., have not been able to generate sufficient financial resources for modernization and expansion of their plants. In this connection, it is necessary to note that there shouldbe adequate incentivesfor new investments in industries which are subjectto administered pricestoavoidandoraccentuateshortage.Asindustrycannotbeexpectedtocontinueproduction unlesscostsarereasonablycovered,thereisneedtoevolvecertaincriteriaforrevisingadministered prices. Itisquiteclearfromtheabovediscussion,thatadministeredpriceshavecertaindefects.Inorderto makeadministeredpricesmorerealistic,theyshouldreflect,thecostrealitiesfromtimetotimeand quickly respond to these changes in the most pragmatic manner. The government administration shouldbeactiveandpromptatthedecisionmakinglevel.Thiswillbringareputationtoadministered pricesandtheymaybeacceptedwithoutmuchcriticism. 5.MarginalCostPricing It is based on a pure economic concept of equilibrium of a firm, where marginal cost is equal to marginalrevenue.Underthismethodpriceisdeterminedonthebasisofmarginalcostwhich referstothecostofproducingadditionalunits.Pricebasedonmarginalcostwillbemuchmore aggressivethantheonebasedontotalcost.Afirmwithlargeunusedcapacitywillhavetoexplore the possibility of producing and selling more. If the price is sufficient to cover the marginal cost, particularlyintimesofrecessionthefirmshouldbeabletoproduceandsellthecommodityandcan thinkofrecoveringthetotalcostinthelongrun. This method though sounds excellent theoretically has the serious limitation of ascertaining the marginalcost.

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6.CustomaryPricing Pricesofcertaingoodsaremoreorlessfixedinthemindsofconsumerstheseareknownas Charmprices.e.g.,pricesofsoftdrinksandotherbeverages.Inthiscaseamoderatechangein costofproductionwillnothaveanyinfluenceonprice. Thoughthismethodhastheadvantageofstability,itisnotcostreflective. 7.PricingofaNewProduct Basicallythepricingpolicyofanewproductisthesameasthatforanestablishedproduct.Theprice mustcoverthefullcostsinthelongrunanddirectcostsorprimecostsintheshortrun.Incaseof new products the degree of uncertainty would be more as the firm is generally ignorant about the costandthemarketconditions.Therearetwoalternativepricestrategieswhichafirmintroducinga newproductcanadopt,viz.,skimmingpricepolicyandpenetrationpricingpolicy. a.SkimmingPricePolicy Thesystemofcharginghighpricesfornewproductsisknownaspriceskimmingforthe objectistoskimthecreamfromthemarket.Afirmwouldchargeahighpriceinitiallywhenit getsafeelingthatinitiallytheproductwillhaverelativelyinelasticdemand,whentheproductlifeis expectedtobeshortandwhenthereisheavyinvestmentofcapitale.g.,electroniccalculators, b.Penetrationpricepolicy Insteadofsettingahighprice,thefirmmaysetalowpriceforanewproductbyaddingalow markuptothefullcost.Thisisdonetopenetratethemarketasquicklyaspossible.Thismethodis generally adopted when there are already well known brands of the product in the market, to maximizesalesevenintheshortperiodandtoprevententryofrivalproducts. SelfAssessmentQuestions2 1.Costpluspricing=cost+______________. 2.Wecomeacrossgoingratepricinggenerallyunder________market. 3.Theobjectiveofcharginghighpricesfornewproductsisto__________frommarket. 4.Therateofreturnpricing=Totalcostperunit+_________________. 5.Administeredpricesarethepriceswhicharefixedandenforcedbythe_________intheoverall interestedofcommunity

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7.7Summary
Knowledgeof costand revenue concepts isof very great importance in understanding the various methodsofpriceoutputdeterminationandpricingpoliciesunderbothperfectandimperfectmarkets. Totalrevenuereferstothetotalreceiptsfromthesaleofthegoods,Averagerevenuereferstothe revenueperunitof the commodity soldand marginal revenue is the additional revenue earned by sellinganadditionalunitofoutput.Therelationshipbetweenrevenueandpriceelasticityofdemand haspracticalsignificanceinrealbusinesslife.Thesetwoconceptshelpthemanagementintakinga rightdecisionwithregardtothesizeoftheoutputandthedeterminationofprice. Differentpricingpoliciesandmethodsgiveaninsightintotheactualfunctioningofafirm.Dynamic conditionsofthemarketnecessitatefrequentchangesinthepricingpoliciesandmethodsfollowed by a firm. While formulating its pricing policy a firm has to keep in its view some of the external factorslikeelasticityofdemand,sizeofthemarket,governmentpolicy,etc.,andinternalfactorslike production costs, the stages of the product on the product life cycle etc., There are a few considerationstobekeptinmindliketheobjectivesofafirm,competitivesituationinthemarket,cost of production, elasticity of demand, economic environment, government policy etc. The main objectivesofthepricingpolicyareprofitmaximization,pricestabilization,facingcompetitivesituation, capturingthemarketetc.Marketpriceofaproductdependsuponanumberoffactorslikeproduction cost,demand,consumerpsychology,profitpolicyofthemanagement,governmentpolicyetc. Therearedifferentmethodsofpricingforbothestablishedproductsaswellasnewproducts.Full costpricingorcostpluspricing,isoneofthesimplestandcommonmethodofpricingadoptedby differentfirms.Herethepriceisdeterminedbyaddingacertainmarkuptotheaveragetotalcost. Rateofreturnpricingisamodifiedformoffullcostpricingwherethemarkupisdecidedonthebasis ofcapitalemployed.Goingratepricingistheoppositeoffullcostpricinggenerallyfollowedunder oligopolymarket.Herethefirmjustfollowsthepriceprevailinginthemarketwithoutbotheringabout otherthings.Imitativepricingissimilartogoingratepricing.Marginalcostpricing,wherepriceis determinedonthebasisofmarginalcostismoretheoreticalthanbeingpractical.Administeredprices arethepricesstatutorilydeterminedbythegovernmentforcertainimportantgoodslikesteel,cement etc.Therearetwoschemesofpricingforanewproductviz.,skimmingpriceandpenetrationprice. Basedonthemarketconditionsandthecostconditionsthesetwomethodsareadopted.

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TerminalQuestions 1ExplaininbrieftherelationshipbetweenTR,AR,andMRunderdifferentmarketcondition. 2.Explaintherelationshipbetweenrevenueconceptsandpriceelasticityofdemand. 3.Whatdoumeanbypricingpolicy?Explainthevariousobjectiveofpricingpolicyoffirm. AnswertoSelfAssessmentQuestions SelfAssessmentQuestions1 1Totalrevenue. 2.AR 3.Marginalrevenue 4.Perfect 5.Imperfect. SelfAssessmentQuestions2 1. Fairprofits 2. Oligopolymarket 3. Skimthecreamfromthemarket. 4. Markup 5. Government AnswertoTerminalQuestions 1. Refertounits7.2 2. Refertounits7.3 3. Refertounits7.4,7.5 4. Refertounits7.6

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