journal N1 2025

DOI: 10.52340/ekonomisti.2025.01.05

Expanded Summary

The article discusses price as a monetary expression of the value of goods. It is noted that pricing products (services) is important because it makes a special contribution to profit maximization, which is an essential goal for most companies. As a rule, companies make a profit by selling goods and services at a price higher than cost. Most firms recognize that there is a relationship between the selling price of a product or service and demand. By studying and analyzing this relationship, it is theoretically possible to determine the optimal price, that is, the price at which the maximum profit is achieved. In addition, many companies use the cost plus markup approach when setting prices. Obviously, if the costs are known, determining the price is easy, so its use is widespread. In addition, when using this method, the reasons for price changes are more objective. In the conditions of a market economy, the discussion of the methodology of this approach to pricing is especially relevant.

Based on individual examples, the rules for product pricing are discussed, which can be used to solve various problems related to product (service) pricing. These rules are:

I. The relationship between the price of a product and the demand for that product is expressed by a linear equation: P = a – bQ;

II. To determine marginal revenue, we must double the slope: MR  = a - 2bQ;

III. We must determine marginal cost (MC), which is the variable cost per unit;

IV. In order to maximize profit, we must set marginal cost (MC) equal to marginal revenue (MR) and solve the equation to determine Q;

V. We must insert the resulting value of Q into the price equation and derive the optimal price;

VI. It may be necessary to calculate maximum profit.

An illustrative example is discussed in this regard. It is noted that the price elasticity of demand estimates the change in consumer demand caused by a change in price, and the corresponding formula is given.

An illustrative example is discussed in this regard. It is noted that the price elasticity of demand estimates the change in consumer demand caused by a change in prices, and the corresponding formula is given.

It is noted that when using the cost plus markup approach for pricing, it is possible to use normative, actual, marginal or total costs. These costs are discussed separately.

To illustrate cost-based approaches for making pricing decisions, specific examples are discussed, in particular, for the cost plus markup approach. The steps to be taken in applying this approach are given step by step.

The article concludes with a summary that states that a company maximizes its profit when marginal cost (MC) = marginal revenue (MR). If the cost of producing an additional unit is less than the additional revenue it receives from selling it, then the firm will be profitable to sell it;

It also states that the reasons for setting prices using the cost plus markup method are more objective. This method may help ensure price stability if all competitors have the same cost structure and apply a similar markup;

At the end of the article, a summary is made, which notes that the cost plus markup method discussed in the article does not strive to establish optimal pricing. Different cost calculation principles produce different cost values ​​and, consequently, different prices. The company must decide for itself whether to use the principle of calculation at full cost or at marginal cost. The cost plus markup method ignores the economic relationship between the price of the product and demand.

Keywords: pricing, marginal cost, marginal revenue, elastic demand, inelastic demand, cost functions, normative costs, markup, margin, relevant costs, variable costs, fixed costs.