LO1  Identify the elements that make up a price.

Price is the money or other considerations (such as barter) exchanged for the ownership or use of a good or service. Although price typically involves money, the amount exchanged is often different from the list or quoted price because of incentives (rebates, discounts, etc.), allowances (trade), and extra fees (finance charges, surcharges, etc.).

LO2  Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge.

Pricing objectives specify the role of price in a firm's marketing strategy and may include profit, sales revenue, market share, unit volume, survival, or some socially responsible price level. Pricing constraints that restrict a firm's pricing flexibility include demand, product newness, other products sold by the firm, production and marketing costs, cost of price changes, type of competitive market, and the prices of competitive substitutes.

LO3  Explain what a demand curve is and the role of revenues in pricing decisions.

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price. Three demand factors affect price: (a) consumer tastes, (b) price and availability of substitute products, and (c) consumer income. These demand factors determine consumers' willingness and ability to pay for goods and services. Assuming these demand factors remain unchanged, if the price of a product is lowered or raised, then the quantity demanded for it will increase or decrease, respectively. Three important forms of revenues impact a firm's pricing decisions: (a) total revenue, which is the total money received from the sale of a product; (b) average revenue, which is the average amount of money received for selling one unit of a product (which is simply the price of the unit); and (c) marginal revenue, which is the change in total revenue that results from producing and marketing one additional unit.

LO4  Describe what price elasticity of demand means to a manager facing a pricing decision.

Price elasticity of demand measures the responsiveness of units of a product sold to a change in price, which is expressed as the percentage change in the quantity of a product demanded divided by the percentage change in price. Price elasticity is important to marketing managers because a change in price usually has an important effect on the number of units of the product sold and on total revenue.

LO5  Explain the role of costs in pricing decisions.

Five important costs impact a firm's pricing decisions: (a) total cost, or total expenses, the sum of fixed cost and variable cost incurred by a firm in producing and marketing a product; (b) fixed cost, the sum of expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold; (c) variable cost, the sum of expenses of the firm that vary directly with the quantity of a product that is produced and sold; (d) unit variable cost, variable cost expressed on a per unit basis; and (e) marginal cost, the change in total cost that results from producing and marketing one additional unit of the product.

LO6  Describe how various combinations of price, fixed cost, and unit variable cost affect a firm's break-even point.

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point is the quantity at which total revenue and total cost are equal. Assuming no change in price, if the costs of a firm's product increase due to higher fixed costs (manufacturing or advertising) or variable costs (direct labor or materials), then its break-even point will be higher. And if total cost is unchanged, an increase in price will reduce the break-even point.