1.

Describe the typical demand curve, including the relationship between price
and sales, in your own words.

A demand curve is a line graph illustrating of the correlation between the price of a good
(or service) and the quantity demanded for a period of time.  The price will appear on
the left vertical axis, the quantity demanded on the horizontal axis. 
When all else remain constant, the nature of the demand curve is that it will move
downward from the left to the right because the quantity demanded falls when the price
rises, and the quantity demanded rises when the price falls.
A price change causes a movement along a given demand curve, but it cannot cause a
shift of the demand curve. This is because a price dchanges causes a change in the
quantity demanded, not a change in demand. For example, if the price of corn rises,
consumers will have an incentive to buy less corn and substitute it for other foods, so the
total quantity of corn consumers demand will fall.
It is other variables influence how much of a good or service is purchased.
Example: news about the possible risks or benefits associated with the consumption of a
good or service can change overall demand.
 
2. Explain break-even analysis, using your own example.
 
Break even analysis is an approach taken by companies to see at which period does a
product or service provided by the company start making a profit. At the break even
point, the product (or service) only covers the costs, making no loses or profits. In other
words, break-even analysis examines and calculates the margin of safety that’s based on
a company’s revenue – as well as related costs of running the organization.The costs
covered in this calculation are mainly fixed. Taking the costs in mind, th3 break-even
point is calculated as
fixed cost / (price per unit - variable costs per unit)

Break Even Analysis Example

Sue starts a small business that sells tiramisu cake. Her variable expenses for each
tiramisu include:

 Flour: $0.50

 Sugar $0.05

 Expresso: $0.05

 Whipping cream: $2.00

 Mascarpone cheese: $3.00

  Ladyfinger: $0.5

 Egg yolks: $2.00

Adding all of these costs together, we determine that she has $8.1 in variable costs per
tiramisu. Based on the total variable expenses per tiramisu, Sue must price her tiramisu
at $8.1. or higher to cover those costs. 

Her fixed expenses per month include:

 Labor: $1,500

 Rent: $3,000

 Insurance: $200

 Advertising: $500

 Utilities: $450

In total, Sue’s fixed costs are $5,650.

Let’s say that each tiramisu is sold for $15.00. Therefore the contribution margin is $6.9
($15.00 - $8.1). 

To figure out how many pizzas (or units) Marissa needs to sell, take her fixed costs and
divide them by the contribution margin:

$5,650 ÷ 8.9 = 634.8

This means Sue needs to sell at least 634.8 tiramisu (rounded up to 635), to cover her
monthly fixed costs. Or, the Sue needs to have at least $9522.5 in sales (635 x $15) to
reach the break-even point. 

3. Clarify the difference between price skimming and penetration pricing, using an
example to illustrate when each pricing strategy would be appropriate.  
 
 Penetration Pricing can be described as a pricing method adopted by the firm
to attract more and more customers, in which the product is offered at low price at the
early stage. Conversely, skimming pricing is used to mean a pricing technique, in which
high price is charged at the beginning to earn maximum profit.
 
 Penetration pricing aims at achieving a greater market share, by offering the
product at low prices. As against the object of using skimming pricing strategy is to earn
maximum profit from the customers, by offering the product at the highest price.
 
1. Penetration pricing strategy is put into practice when the demand for the
product is relatively elastic. On the other hand, skimming pricing is used when the
demand for the product is inelastic.
 
1. In case of penetration pricing, the profit margin is low, whereas, in skimming
pricing, the profit margin is very high.
 
1. As the price of the product is initially low in penetration pricing, huge
quantities of product is sold by the firm. As against, due to high price of the product
customer demand small quantity of the product, in case of skimming pricing.
 
Example of penetration pricing: Starbucks, a premium coffee chain, often introduces
new and seasonal coffees and drinks at a lower price point to encourage consumers to
try these new items. Once consumers get accustomed to these items on the menu and
show a positive response, Starbucks then retracts the penetration pricing offers and starts
selling these at the usual non-discounted prices. 
 
Example of skimming pricing Apple’s prices for newly released products seem to be so
high that they’re almost dissuasive — and yet, there are always queues outside Apple
stores on iPhone release days.
That’s because Apple products :
 Have inelastic demand - they s a huge number of customers who already see
the brand as immensely credible and attractive.
 Apple does not have immediate competition that’s able to undercut them.
 It uses high pricing to signal the higher quality of its new product, a perception
reinforced by the rest of its product array ( the components of which are all at various
later stages of the skimming cycle).
As a result, Apple is perfectly placed to exploit the benefits of price skimming to the
fullest.