shutdown price
The shutdown price is described as a situation where the average revenue generated is lesser than the variable costs. Price elasticity is defined as a measure of how a market reacts to changes in price. Price changes are mainly attributed to the responsiveness associated with quantity demanded and supplied and the various actions that will result in changes in price. Elasticity is defined as the degree of change that may result in price changes. With elasticity, a company will be better placed to come up with prices. Understanding whether a product is elastic or inelastic in terms of demand will go a long way into determining prices. In understanding the elasticity of a product, a company will understand that some products have substitutes. Without reviewing prices, consumers will be tempted to go for cheaper and more affordable products. By understanding elasticity, companies will be better placed to develop decisions that will enable the management on whether raising or lowering the prices will lead to the company achieving its objectives.
There are many dangers to relying on costs to determine prices. Some of the dangers associated with costs include customers not being interested in costs. Consumers will always opt to go for more appealing products, and they do not even consider costs. A good example includes car brands. Some customers will go for a cheap Toyota or buy a jeep depending on their interests. Costs pricing does not consider competitor prices. This may lead to a company losing much revenue. Thus, it is better placed for companies to ensure that they come up with better pricing methods that will ensure that they get more customers and accrue revenue that will ensure that their businesses are viable.