Theme 4 - Business objectives and pricing decisions

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  • Created by: becky.65
  • Created on: 11-01-18 19:11
How do you calculate average cost?
Total costs / Quantity sold
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How do you calculate average revenue?
Total revenue / Quantity sold
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How do you calculate profit?
Total revenue - Total costs
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What is marginal cost?
The cost of producing one more unit of output
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What is marginal revenue?
The extra revenue that comes from selling one more unit of output
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Why are marginal costs and marginal revenue important?
Because businesses need to see how much it would cost to produce a bit more or a bit less of a good, thus by comparing the extra revenue generated by producing a bit more they can see the loss or gain
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With perfect competition, why is the choice of producing more or less easy?
It will not change the price so if occasionally they run out of stock they should produce more because marginal revenue could be higher than marginal cost, so profit will rise if they get the increase just right
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Why is producing more or less more complicated in an oligopoly?
Producing more may mean that the market is flooded and prices fall. Before deciding, the business must estimate the likely fall in prices and decide what will happen to total revenue. With some market power, the business can have a degree of control
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When is profit maximised?
When MC = MR. If MR>MC it will pay to produce more. If MC>MR it will be best to produce less
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What is contribution?
The revenue from each extra unit sold minus its variable cost. It is the amount contributed to fixed costs by each individual sale but if fixed costs are already covered it is pure profit. It is MR - MC
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What pricing strategy will a sales of revenue maximising company use?
They will tend to think in terms of mass markets and have penetration pricing, competitive pricing or cost-plus pricing
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What pricing strategy will a profit maximising business consider?
Price skimming or premium pricing, especially with products in a new market
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What pricing strategy will a business with market power use?
Predatory pricing, although this is illegal
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Other cards in this set

Card 2

Front

How do you calculate average revenue?

Back

Total revenue / Quantity sold

Card 3

Front

How do you calculate profit?

Back

Preview of the front of card 3

Card 4

Front

What is marginal cost?

Back

Preview of the front of card 4

Card 5

Front

What is marginal revenue?

Back

Preview of the front of card 5
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