April 30, 2018

Cost Information for Pricing Decisions

Pricing decisions are normally market based and they are based on analysis of demand curves.

But product cost information is required in the pricing decision to arrive at the profit available at a proposed price. If the profit available is insufficient, a firm can't sustain its production and marketing. Only for short periods of time, the firms may be in market even though profits are inadequate in the light of expected long term profits.

Some of the pricing decision moments are:

1. Pricing decisions at the time of preparing a new catalogue.
2. Price increase decision in response to inflation.
3. Pricing for new or improved products.
4. Pricing for selling under private label.
5. Pricing in response to a new price by competitor
6. Pricing bids in both closed and open bidding decisions.

Pricing decision rules and procedures depends on the characteristics of the market in which the firm operates.

In perfect competition markets, a firm is a price taker. In these markets, marginal cost information determines the quantity produced by a firm. Because, as per the description of perfectly competitive market, a firm sell as much as it wants to produce without affecting the market price.

In imperfect competition, the price charged by a firm will influence the quantity of units it sells. Additional sales can be sold only when price is reduced.

Updated on 1 May 2018, 
8 December 2011

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