In this appendix, we are concerned with the more common situation in which a business is faced with the problem of setting its own prices. Clearly, the pricing decision can be critical. If the price is set too high, customers won’t buy the company’s products. If the price is set too low, the company’s costs won’t be covered. | Pricing Products and Services Appendix A Appendix A: Pricing Products and Services This appendix focuses on pricing products and services. It explains the economist’s approach to pricing, the absorption costing approach to cost-plus pricing, and the meaning of target costing. Learning Objective A-1 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost. Learning objective A-1 is to compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost. The Economists’ Approach to Pricing Elasticity of Demand The price elasticity of demand measures the degree to which the unit sales of a product or service are affected by a change in unit price. Change in Price versus Change in Unit Sales Economists’ look at pricing by examining the price elasticity of demand for the good or service. The price elasticity of demand measures the degree of change in sales impacted by a change in price. | Pricing Products and Services Appendix A Appendix A: Pricing Products and Services This appendix focuses on pricing products and services. It explains the economist’s approach to pricing, the absorption costing approach to cost-plus pricing, and the meaning of target costing. Learning Objective A-1 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost. Learning objective A-1 is to compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost. The Economists’ Approach to Pricing Elasticity of Demand The price elasticity of demand measures the degree to which the unit sales of a product or service are affected by a change in unit price. Change in Price versus Change in Unit Sales Economists’ look at pricing by examining the price elasticity of demand for the good or service. The price elasticity of demand measures the degree of change in sales impacted by a change in price. Price Elasticity of Demand Demand for a product is inelastic if a change in price has little effect on the number of units sold. Example The demand for designer perfumes sold at cosmetic counters in department stores is relatively inelastic. Demand for a product is said to be inelastic if a change in price has little effect on the number of units sold. For example: The demand for designer perfumes sold at cosmetic counters in department stores is relatively inelastic. Price Elasticity of Demand Demand for a product is elastic if a change in price has a substantial effect on the number of units sold. Example The demand for gasoline is relatively elastic because if a gas station raises its price, unit sales will drop as customers seek lower prices elsewhere. Demand for a product is considered elastic if a change in price has a substantial effect on the number of units sold. We all know that in this period of relatively high gasoline prices, we are more likely to shop for a station that .
