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K E E Y T E R M !

L01 price that which is givenup in an exchange toacquire a good or service

revenue the price charged tocustomers multiplied by the numberof units sold

profit revenue minus expenses

L0 2 return on investment(ROI) net profit after taxesdivided by totalassets

market share a company's productsales as a percentage of total sales forthat industrystatus quo pricing a pricingobjective that maintains existing pricesor meets the competition's prices

L0 3 demand the quantity ofa product that will be soldin the market at various

prices for a specified periodsupply the quantity of a productthat will be offered to the marketby a supplier at various prices for aspecified periodprice equilibrium the price atwhich demand and supply are equal

elasticity of demand consumers'responsiveness or sensitivity tochanges in priceelastic demand a situation in whichconsumer demand is sensitive tochanges in priceinelastic demand a situation inwhich an increase or a decreasein price will not significantly affectdemand for the product

unitary elasticity a situation inwhich total revenue remains the samewhen prices change

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K E Y C O N C E R T S

Discuss the importance of pricing decisions to the economy andto the individual firm. Pricing plays an integral role in the U.S. economy byallocating goods and services among consumers, governments, and businesses.

Pricing is essential in business because it creates revenue, which is the basis of all businessactivity. In setting prices, marketing managers strive to find a level high enough to producea satisfactory profit.

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List and explain a variety of pricing objectives. Establishing realistic andmeasurable pricing objectives is a critical part of any firm's marketing strategy.Pricing objectives are commonly classified into three categories: profit oriented, sales

oriented, and status quo. Profit-oriented pricing is based on profit maximization, a satisfactorylevel of profit, or a target return on investment (ROI). The goal of profit maximization is to generateas much revenue as possible in relation to cost. Often, a more practical approach than profitmaximization is setting prices to produce profits that will satisfy management and stockholders.The most common profit-oriented strategy is pricing for a specific return on investment relativeto a firm's assets. The second type of pricing objective is sales oriented, and it focuses on eithermaintaining a percentage share of the market or maximizing dollar or unit sales. The third type ofpricing objective aims to maintain the status quo by matching competitors' prices.

P r o fi t O r i e n t e d S a l e s O r i e n t e d S t a t u s Q u o

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SatisfactoryProfits

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costs• Increase

revenue

Net profitafter tax

Total assets

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SalesMaximization

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Explain the role of demand in price determination. Demand is a keydeterminant of price. When establishing prices, a firm must first determinedemand for its product. A typical demand schedule shows an inverse relationship

between quantitydemanded and price:When price is lowered,sales increase; and whenprice is increased, thequantity demanded falls.For prestige products,however, there maybe a direct relationshipbetween demand andprice: The quantitydemanded will increaseas price increases.

Quantity demanded(a)

Quantity demanded(b)

What affects elasticity?• Availability of substitutes• Price relative to purchasing power• Product durability• Product's other uses. Inflation rate

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