U18MBT7000-ENGINEERING

ECONOMICS & FINANCIAL

MANAGEMENT

Mr. S. ARUNKUMAR/AP
Department of Electrical & Electronics
Engineering
CH1: ECONOMICS, COST &
PRICING CONCEPTS
CONTENTS
❑ Economic Theories
❑ Demand Analysis

❑ Demand Forecasting

❑ Different types of Cost

❑ Cost Curves

❑ Breakeven Point and its Limitations

❑ Profit-Volume Ratios

❑ Pricing Methods
ECONOMICS:
ECONOMICS:
❑ From the Picture it is clear that, each one of the family
members have different kind of wish list in his mind.

❑ So, the head of the family (Father/Mother) finds out the

prices of that different things, decides upon the thing
which suits most for all of his/her family member and
spend his money in such a way that he/she gets
maximum happiness/variety and at the same time
saves as much as possible.
ECONOMICS:
❑ Economics explains, how to utilise our limited
resources in the most satisfying manner.

❑ So, we are applying the principles of economics in

our day to day life directly/indirectly.

Another E.g.
➢ A person goes to Market to purchase vegetables
(Cost of Tomato is high compared to bitter guard).
ECONOMICS-DEFINITION:
❑ Economics is a science of Production, Exchange and
Consumption in economic systems. It shows how
source resources can be used to increase the
human wealth and welfare.

→Locke Anderson, Ann Putallaz and William Shepherd , Economics, Prentice

Hall Inc., 1983
ECONOMICS-DEFINITION:
❑ Economics as the study of how societies use scarce
resources to produce valuable commodities and
distribute them among different people.

→Paul A. Samuelson and William Nordhaus, Economics, McGraw Hill,

England, 1995
ECONOMICS-DEFINITION:
❑ Economics as the study of how society decides
what, how and for whom to produce.

→David Begg, Stanely Fischer and Rudiger Dornbusch, Economics, McGraw

Hill, England, 1987
ECONOMIC ACTIVITIES:

Requirement
(Needs)

Satisfied after Put Effort to

afford that afford that
Need requirement

Earn Money
ECONOMIC ACTIVITIES:
❑ A person wants Food, Clothes, House and Entertainment
(to feel refreshed after a day’s hectic work) → He needs
Money to satisfy these needs → He works hard to earn it

❑ In other words, there are different types of organisation in

society involves different kinds of activities such as farming,
trading, banking, etc., → These activities carried out for the
purpose of earning money → To buy necessary goods
which satisfy our needs.
DEMAND ANALYSIS
DEMAND-DEFINITION:
❑ Demand is defined as a desire which is backed by Purchasing Power and
Willingness to pay & ability to buy.

❑ In other words, if person wants a car and cannot be able to pay for it
means, there is no demand for the car from his/her point of view. But the
same time, if the price of the tomato & onion getting hiked means, it will be
more demanded in his/her point of view.

❑ A product or service is said to have demand when the following three

conditions are met:
➢ Desire on the part of the buyer to buy
➢ Willingness to pay for it.
➢ Ability to pay the specified price for it.
DEMAND-CONDITION: Rs. 600

Rs. 580/-
➢ Desire on the part of the
buyer to buy

➢ Willingness to pay for it.

➢ Ability to pay the specified

price for it.
DEMAND-TYPES:
❑ INDIVIDUAL DEMAND: The quantity of goods an individual wishes
to purchase at a particular price and time period. → Mobile

❑ MARKET DEMAND: The quantity of goods customers of the

product wishes to purchase at a particular price and time period.

❑ DEMAND FOR FIRM’s & INDUSTRY PRODUCT: The quantity of the

firm’s good that can be sold at a given price and time.

❑ DERIVED DEMAND: Demand for a product that arises due to the

demand of some other product. E.g., Tomato Price→ Due to
increase in fuel price for transportation.

❑ AUTONOMOUS DEMAND: Demand is independent and doesn’t

depend on any other product (Milk Price).
DETERMINANTS OF DEMAND-FACTORS
INFLUENCING:
❑ Price of the Product (E.g., Pringles, Tomato Price)

❑ Buyers Income (E.g., Four-Wheeler)

❑ Price of the substitutes (E.g., iPhone Display, Volkswagen, Swift Dzire)

❑ Advertising and Sales Promotion (E.g., Horlicks, Boost, Shampoo)

❑ Population (E.g., Real Estate, Gold, Rice, Meat, Schools)

❑ Season of the year (E.g., Umbrella, Jerkin, Plum, Cauliflower)

❑ One’s Status (E.g., iPhone, Mac, Galaxy)

❑ Changes in customer’s taste (E.g., Lays, Clothes, Silver Ornaments)

❑ Need and Performances (E.g., Nokia, Moto, Grinder)

❑ Expected future trend in prices (E.g., Gold)

DEMAND-MAJOR FACTORS:
PRICE & DEMAND:
❑ Law of Demand:
❑ The law of demand states that a higher price leads to a lower quantity
demanded and that a lower price leads to a higher quantity demanded.
PRICE & DEMAND:
❑ Scenario: Surge Pricing in Ride-Sharing
❑ Normal Conditions:
❑ Price for a ride: Rs. 100/-

❑ Demand for rides: 200/- rides per hour

❑ Event Occurs (e.g., movie ends, heavy rain starts):

❑ Demand for rides: Increases to 300/- rides per hour

❑ Initial Price for a ride: Still Rs. 100/-

INCOME & DEMAND-RELATIONSHIP:
❖The income of the customers plays an important role in the
sales/demand of a product.

❖Normal Goods:
As income increases, the demand for normal goods also increases. These are
goods for which consumers' demand rises as their purchasing power improves
(e.g., electronics, clothing, featured mobile).

❖Inferior Goods:
As income increases, the demand for inferior goods decreases. These are goods
for which consumers' demand falls as their income rises because they can now
afford better alternatives (e.g., generic brands, public transportation).
INCOME & DEMAND-RELATIONSHIP:
INCOME & DEMAND-RELATIONSHIP:
❖Income Elasticity of Demand:
A measure of how much the quantity demanded of a good changes in
response to a change in consumers' income.

Income Elasticity of Demand (YED) = % Change in Quantity

Demanded / % Change in Income.
Types:
❖Positive YED (> 1): Luxury goods (demand increases more than
proportionately as income rises).
❖Positive YED (< 1): Necessities (demand increases less than proportionately
as income rises).
❖Negative YED: Inferior goods (demand decreases as income rises).
PRICE OF RELATED GOODS & DEMAND:
❖The demand for certain products are affected by changes in the
prices of related goods.

❖The related goods are categorized as Substitute Goods and

Complements.
PRICE OF RELATED GOODS & DEMAND:
❑Types of Related Goods:
❑Substitute Goods:
Goods that can replace each other. An increase in the price
of one leads to an increase in the demand for the other.
❑Complementary Goods:
Goods that are consumed together. An increase in the price
of one leads to a decrease in the demand for the other.
PRICE OF RELATED GOODS & DEMAND:
❑Substitute Goods-Example:
❑ If the price of coffee rises significantly, consumers might buy more
tea as an alternative, leading to an increased demand for tea.

❑ Air Travel and Train Travel: If airfares increase, people might opt for
train travel, increasing the demand for train tickets.

❑ Streaming Services: If the price of one streaming service (e.g., Netflix)

increases, consumers might switch to another service (e.g., Amazon
Prime), increasing its demand.
PRICE OF RELATED GOODS & DEMAND:
❑Complementary Goods-Example:
❑Printers and ink cartridges. If the price of printers decreases,
the demand for printers will likely increase, leading to a higher
demand for ink cartridges.
❑Real-world Scenario: If the price of smartphones decreases,
the demand for smartphones increases, which in turn increases
the demand for related accessories like phone cases and
chargers.
❑Cars and Fuel: If the price of cars decreases, more people
might buy cars, increasing the demand for fuel.
DEMAND FORECASTING
DEMAND FORECASTING
❑ Demand forecasting is a field of predictive analytics which tries
to understand and predict customer demand to optimize supply
decisions by corporate supply chain and business management.

❑ The process in which historical sales data is used to develop an

estimate of an expected forecast of customer demand.

❑ It is used to make an advanced arrangements of raw materials,

equipment's, labors, etc.,

❑ A forecast helps a firm to access the probable demand for its

products and plan its production accordingly.
DEMAND FORECASTING-TYPES
❑ SHORT TERM FORECASTING:
➢ Analysis carried out for a period of One Month to One
Year.

➢ This period depends on the nature of business.

➢ If the demand fluctuates one month to another,

forecasting may be done only for a short period

➢ E.g.,
Cool Drinks, Sweater, etc.,
SHORT TERM FORECASTING-EXAMPLE:
• A local grocery store wants to forecast the demand for fresh product for the
upcoming week. Accurate demand forecasting is crucial to ensure they stock the
right amount of product, minimizing waste and maximizing sales.
Data Collection& Analysis:
1. Historical Sales Data: Analyze past sales data to identify patterns. For example,
the store might notice that sales of berries increase during hot weather.
2.Weather Forecast: Correlate weather forecasts with historical sales data to adjust
predictions. For example, if the forecast predicts hot weather, increase the forecast
for berries and watermelons.
3.Promotional Activities: Factor in the effect of promotions. If the store is running a
discount on tomatoes, the forecasted demand for tomatoes should be adjusted
upwards.
4.Local Events: Adjust forecasts based on local events. For example, if a local festival
is happening, there might be an increased demand for snacks and beverages.
SHORT TERM FORECASTING-EXAMPLE:
An online electronics retailer wants to forecast the demand for smartphones
during an upcoming flash sale.

• Data Collection & Analysis:

1. Historical Sales Data: Analyze past flash sale data to identify peak sales
periods.

2.Current Market Trends: Consider the popularity of new smartphone models..

3.Advertising Spend: Estimate the impact of advertising spend on sales..

4.Competitor Activity: Adjust forecast based on competitor promotions.

5.Customer Behavior: Website traffic and customer queries about

smartphones
DEMAND FORECASTING-TYPES
❑ LONG TERM FORECASTING:
➢ Analysis carried out for a period of 5, 10 or even 20 years (Long Term).
➢ This period depends on the nature of business. But for beyond 12 months
the future is assumed as uncertain
➢ It involves analyzing historical data, market trends, economic indicators,
and various other factors to make informed predictions about future
demand patterns.
➢ This type of forecasting is essential for strategic planning, capacity
planning, investment decisions, and long-term business sustainability.
➢ E.g.,
Ship Building, Petroleum Refinery, Paper Making, Power Generation, etc.,
 LONG TERM FORECASTING-EXAMPLE:
A company that manufactures solar panels wants to forecast the demand for its products
over the next five years to plan its production capacity and investment strategy.

Data Collection & Analysis:

1. Historical Sales Data: Identify the growth rate in solar panel sales over the past decade.

2. Market Trends: Analyze Current trends in renewable energy adoption and government
incentives for solar energy.

3. Economic Indicators: Consider economic factors like GDP growth, energy prices, and
disposable income levels will impact demand.

4.Technological Advancements: Innovations in solar panel efficiency and cost reduction.

5. Regulatory Environment: Government policies and regulations promoting renewable

energy.
6.Environmental Factors: Increasing awareness of climate change and sustainability
initiatives.
 LONG TERM FORECASTING-EXAMPLE:
A company that manufactures solar panels wants to forecast the demand for its products
over the next five years to plan its production capacity and investment strategy.

Data Collection & Analysis:

1. Historical Sales Data: Identify the growth rate in solar panel sales over the past decade.

2. Market Trends: Analyze Current trends in renewable energy adoption and government
incentives for solar energy.

3. Economic Indicators: Consider economic factors like GDP growth, energy prices, and
disposable income levels will impact demand.

4.Technological Advancements: Innovations in solar panel efficiency and cost reduction.

5. Regulatory Environment: Government policies and regulations promoting renewable

energy.
6.Environmental Factors: Increasing awareness of climate change and sustainability
initiatives.
 LONG TERM FORECASTING-EXAMPLE:
❑An electric vehicle manufacturer wants to forecast the demand for EVs over the next
decade to plan for production capacity, R&D investment, and market expansion.

❑A pharmaceutical company wants to forecast the demand for a new chronic disease
medication over the next 10 years.

❑A construction company wants to forecast the demand for residential housing

projects over the next 15 years to plan for land acquisition and resource allocation.

❑A hotel chain wants to forecast the demand for rooms and services over the next ten
years to plan for expansion, resource allocation, and marketing efforts-Tourism.

❑A tech company wants to forecast the demand for a new smartphone model over
the next three years to plan production, supply chain logistics, and marketing
strategies.
DEMAND FORECASTING-
METHODS
❑ Survey of Buyer’s Intentions or Opinion Survey

❑ Collective Opinion or Sales Force Polling

❑ Trend Projections

❑ Economic Indicators
 OPINION SURVEY
❑ Most direct method of making forecasting for
short-term, in which the customers are asked
what they are thinking to buy in near future.

❑ This method is useful when large quantities are

sold to industrial producers.

DRAWBACKS:
➢ The entire burden of forecasting is shifted to the
customer which is not wise and risky.
➢ Customers may exaggerate their requirements.
➢ Customers may be uncertain about they intend to
purchase from a particular firm.
COLLECTIVE OPINION:
❑ Salesmen are asked to estimate sales in their respective
territories.

❑ Salesmen are the person who are closest to the customer.

❑ So that this forecast give a close idea of customer reaction to the

products.

❑ The individual salesmen estimates are added to get the total

sales estimates.

❑ This sales estimates is checked several times to avoid undue

imaginations and also examined in the light of factors like
expected change in the design, change in prices, etc.,
COLLECTIVE OPINION:
ADVANTAGES:

❑ Simple and doesn’t require any statistical techniques

❑ This forecast is based on the knowledge of salesman, who are

directly responsible for changes.

❑ It is very much useful in the case of new products.

DISADVANTAGES:

❑ Suitable only for Short-Term Forecasting

❑ As the salesmen have no idea about the economic changes

means, the estimate by them are not so correct.
TREND PROJECTIONS:
❑ A well established firm has considerable data's on sales.

❑ These data's are arranged in a chronical order called as “Time Series”.

❑ These Time Series are analysed by the method named as “Project the
Trend”.

❑ In this method the trend line is projected by some statistical method,

generally by least square method.

❑ A real challenge for the forecaster comes when there is a turning point, that
is when management will change or revise its sales or production.

❑ The four important factors generally responsible for the turning point is,

(i) Trend (ii) Seasonal Variation

(iii) Cyclical Fluctuations (iv) Irregular or Random Forces.

TREND PROJECTIONS:

With the help of past sales data, predict the future trend
TREND PROJECTIONS:
ECONOMIC INDICATORS:
❑ In this forecasting method certain economic indicators are used which
generally published by “Central Statistical Organisation” under the
national income estimates. Some of this indicators are;
➢ Personal Income for the demand of Consumer’s Goods

➢ Agricultural Income for the demand of agricultural inputs, implements,

etc.,

➢ Construction Contracts sanctioned for demand of building materials

➢ Registration of Automobiles for the demand of accessories, petrol, etc.,

LIMITATIONS:

❑ Appropriate Economic Indicator is difficult to find out

❑ For new products, no past data are available.

COST TYPES
DIFFERENT TYPES OF COSTS:
❑ In production, research, retail, and accounting, a cost is the value of
money that has been used up to produce something or spend to
obtain something.

❑ The different types of Costs are:

➢ Actual Cost

➢ Opportunity Cost

➢ Incremental Cost

➢ Sunk Cost

➢ Fixed Cost

➢ Variable Cost

➢ Marginal Costing
ACTUAL COST:
❑ Absolute Cost or Outlay Cost
❑ Actual expenditure incurred for acquiring or producing a good
or service.
❑ These costs are generally recorded in the account’s books.
❑ This includes all costs directly related to the production, like
materials and labor.
❑ It also includes indirect costs, like rent and utilities.
❑ Tracking these costs helps in knowing how much is really
spent, which is important for budgeting and financial
planning.
OPPORTUNITY COST:
❑ Opportunity cost is the cost that you don't actually pay.

❑ Opportunity cost is the benefit you miss out on by not choosing

another option.

❑ It's the loss of other choices when you pick one choice.

E.g.,
➢ A commuter takes the train to work instead of driving. It takes 70 minutes
on the train, while driving takes 40 minutes. The opportunity cost is an hour
(30mins + 30 mins) spent elsewhere each day.

➢ A student spends three hours and Rs. 500 at the movies the night before an
exam. The opportunity cost is time spent studying and that money to
spend on something else.
OPPORTUNITY COST:
INCREMENTAL COST:
❑ Differential Cost.
❑ Incremental cost is the extra money spent because of a
change in business activities.
❑ It only happens when there is a change in the existing plant or
operations.
❑ Incremental cost is the total extra cost of making one more
unit of a product.
E.g.,
➢ Adding a new machine, Replacing a machine by a better one, addition
of a new product line.
SUNK COST:
❑ A sunk cost refers to money that has already been spent and which
cannot be recovered.
❑ It is not affected or altered by a change in the level or nature of
business activity.
❑ If you buy a non-refundable ticket to an event and decide not to go,
the money spent on the ticket is a sunk cost.
❑ Incremental cost will be the acquisition cost (Price of the machine,
packaging, transport, installation), service and maintenance cost.
❑ But the sunk cost is operating and space occupancy cost for the
machine which is not altered for if we expand the plant or shrink the
plant.
FIXED COST:
❑ Constant Cost.
❑ Fixed costs do not change with the amount of production or
business activity.
❑ Fixed costs will be incurred even if there is no production or
activity.
❑ Fixed costs are the same no matter how much you produce,
but the fixed cost per unit gets lower when you produce more.
❑ If you produce more, the fixed cost per unit is lower
E.g.,
Barbeque Nation, Salaries, Insurance, Rent, Birthday Cake
VARIABLE COST:
❑ The total cost value will vary proportionally to the level of
activity or changes in the volume of production.

❑ Variable cost will be incurred only when there is production or

when activity is being carried out.

❑ The total variable cost is varying proportional to the volume of

production.

E.g.,

Material Cost, Labor Cost, Birthday Treat

MARGINAL COST:
❑ Marginal cost is, the change in the total cost that arises when
the quantity produced is incremented by one unit

E.g.,

If the total cost of producing two unit is Rs. 100, and

additionally another one unit is added for production. On this case
the total cost increased from Rs. 100 to Rs. 140, then the marginal
cost of the third unit is Rs. 40.
COST CURVE:
ELEMENTS OF COST:
❑ The cost of the product manufactured must be calculated in
order to get an exact idea of the profit that can be made.

❑ Number of expenditures are incurred during the manufacture

of a product.

❑ No item of expenditure should be left, while calculating the

total cost of the product.

❑ Hence the total cost is divided into different headings known

as “Elements of Cost”
ELEMENTS OF COST:
Direct Material
Cost
Material
Cost
Indirect
Material Cost

Direct Labour
Cost
Labour
Cost
Elements of Indirect Labour
Cost Cost

Factory
Expenses

Administrative
Expenses
Expenses
Selling
Expenses

Distribution
Expenses
ELEMENTS OF COST:
❑ Material Costs → Direct Materials:
❑ These are raw materials that can be directly traced to the production of a
specific product.

❑ Example: In an automobile manufacturing company, steel, tires, and engines

are direct materials. The cost of these materials can be directly attributed to the
cost of manufacturing each car. But seat cover → Indirect Material

❑ Indirect Materials:
❑ These are materials that are not directly traceable to a specific product but are
necessary for the production process.

❑ Example: In a furniture manufacturing company, glue, nails, and varnish are

indirect materials. While these materials are essential for production, their costs
cannot be directly allocated to a specific piece of furniture.
ELEMENTS OF COST:
❑ Labor Costs → Direct Labor:
❑ This includes wages and salaries for employees who are directly involved in the
production of goods or services.

❑ Example: In a bakery, the wages paid to bakers who mix ingredients, bake bread,
and decorate cakes are direct labor costs. Their work can be directly associated with
the production of baked goods.

❑ Indirect Labor:
❑ This includes wages and salaries for employees who are not directly involved in
production but support the process.

❑ Example: In a factory, the salaries of maintenance workers, supervisors, and quality

control inspectors are considered indirect labor costs. They are necessary for
production but do not directly create the product.
BREAKEVEN ANALYSIS:
BREAKEVEN ANALYSIS:
❑ It is an analysis done to determine the point of activity at which

the total cost will be equal to the total revenue.

❑ This point is named as “Breakeven Point” and at this point the

volume of output has no profit / no loss.

❑ This breakeven analysis is done algebraically or graphically.

 BREAKEVEN POINT:
❑ The breakeven point is the level of production at which the
costs of production equal the revenues for a product.

❑ There is no net loss or gain.

❑ Any activity beyond this point will be profitable one and activity
below the point will be Losable one.
BREAKEVEN CHART (BEC):
❑ A Breakeven Chart is a chart that shows the sales volume level at which
total costs equal sales.

❑ Losses will be incurred below this point, and profits will be earned above
this point.

❑ The chart plots revenue (sales), fixed cost and variable cost on the vertical
axis, and volume on the horizontal axis.

❑ In break even chart, the fixed cost line will be parallel to the output which
indicates that the fixed costs are independent of output.

❑ Total cost is the addition of fixed and variable cost. Therefore it starts
from the fixed cost line and moves upwards proportional to output.
BREAKEVEN CHART (BEC):
 BREAKEVEN CHART (BEC):
❑ The total sales (Revenue) line will start from the origin and moves
upwards.
❑ At a particular point, total cost line intersects the total sales line →
That point is named as “Breakeven Point”
❑ At this point, the total cost equals to the total sales (i.e) the
production cost is equal to the selling price. So that at this point
there is no profit and no loss.
❑ Sales beyond this point will be profitable one and vice versa.
❑ The chart is useful for portraying the ability of a business to earn a
profit with its existing cost structure.
BREAKEVEN CHART TERMINOLOGIES:
ANGLE OF INCIDENCE:

❑ Angle between total cost line and total sales line at the breakeven point.

❑ It will give the profitability position of the product.

❑ Greater the angle greater the profitability and vice versa.

MARGIN OF SAFETY:

❑ Distance between the actual sales and break even sales on the break
even chart.

❑ Greater the margin, safer the firm from business losses, market variations
and production differences will not affect the profitability.
MARGIN OF SAFETY:

Margin of Safety (units)=Actual Sales (units)−Break-even Sales (units)

Let's consider an example of a company that produces and sells widgets:
❑ Fixed Costs: Rs. 50,000
❑ Variable Cost per Unit: Rs. 30
❑ Selling Price per Unit: Rs. 50
First, calculate the break-even point in units:
Break-even Point (units)=Fixed Costs/(Selling Price per Unit−Variable Cost per Unit)
= 50,000/(50−30)=2,500 units
Assume the company’s actual sales are 4,000 units.
• Margin of Safety (units) = Actual Sales (units)−Break-even Sales (units)
= 4,000−2,500
= 1,500 units
 BREAKEVEN CHART LIMITATIONS:
❑ Breakeven chart is built on the fundamental assumption that fixed
costs are fixed at all levels of activity.

❑ But at higher level of activity, due to the impacts of semi fixed costs,
fixed cost line will turnout to be a curve.

❑ Similarly, total cost line will be a curve after a certain level.

❑ At higher level of sales, the total sales revenue will begin to diminish
due to additional or extra advertisement, extra discounts, etc.,

❑ Therefore, the total sales line will intersect the total cost line at more
than one point. All these points are called breakeven points.
 CONTRIBUTION:
❑ Contribution is the difference between Sales and Marginal or
Variable Cost.

❑ It is also equal to the total of Fixed Cost and Profit.

❑ Contribution is not a Profit. Greater the Contribution, greater the

Profit.
Contribution=Sales (S) – Variable Cost (V) = Fixed Cost (F) + Profit (P)

C = S-V = F+P

C≠P
PROFIT-VOLUME RATIO or
RELATIONSHIP:
 P/V RATIO:
❑ It is the ratio of contribution to sales.
❑ With the help of P/V ratio, BEP can be calculated without a break
even chart.
𝑪=𝑭+𝑷
At BEP,
Profit, P = 0
Therefore at BEP,
C=F
Now,
P/V = C/S
 P/V RATIO:
At BEP,
𝑺 = 𝑺𝑩𝑬𝑷

Substituting and Cross Multiplying, we get,

𝑺𝑺𝑬𝑷 = 𝑭ൗ𝑷/𝑽

❑ P/V ratio is used for,

➢ Profit Planning

➢ Determination of optimum production mix and sales mix

➢ For performance evaluation

➢ Determination of different alternatives where there are number of limiting

factors or key factors.
PRICE
 PRICE FIXATION:
❑ Price is the amount of money for which a product or service can be
exchanged.
❑ It is important to fix the price of the product or service. Because the
buyer doesn’t buy a physical product alone.
❑ He also acquires certain services and want-satisfying benefits (Free
Home Delivery, Warranty, Guarantee, Packaging, etc.,) along with the
product.
❑ Thus, a seller usually prices a combination of the physical product plus
other services and benefits.
❑ Therefore Price may be defined as the amount of money which is
needed to acquire in exchange some combined assortment of a
product and its accompanying services.
 PRICE FIXATION-GENERAL
GUIDELINES:
❑ Find the Prime Cost (Direct Expenses) and Overhead Cost
(Indirect Expenses) to fix the total cost of the product.
❑ Compare the cost of your product with those of the competitors.
❑ An eye should always be kept on the market. If orders are difficult
to get, the chances are that the price will have to drop a bit and
vice versa.
❑ If the cost of your raw materials and labor increases, look into
your competitor and then increase the price if chances available.
❑ Charge higher prices when demand is high (Seasonal Product)
and vice versa.
 PRICING POLICIES:
❑ Pricing Policies constitute the general framework (guidelines)
within which pricing decisions are made.

❑ A firm doesn’t follow the single pricing policy rather it needs a

bundle of pricing policies.

❑ These pricing policies not only for the Firm and its pricing
objectives but it is suitable for overall marketing situations.

❑ Pricing policy should aim at promoting long term welfare of the

enterprise and maximizing profits for the entire operations over
the long-run.
 PRICING POLICIES-GENERAL CONSIDERATIONS:
❑ Competitive Situation:

❑ Goal of Profit and Sales:

❑ Long Range Welfare of the Firm:

❑ Flexibility:

❑ Government Policy:

❑ Overall Goals of Business:

❑ Price Sensitivity:

❑ Routinisation of Pricing:
PRICING METHODS:
THANK YOU….!