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What is Pricing and Profitability in Economics?
Pricing: Pricing in Economic theory is that companies will sell a product as long as the revenue from additional units exceeds the cost of producing that product. Beyond this, pricing is subject to the demand and supply interactions in the market. In the long run, a business must cover all costs and make a satisfactory profit in order to remain a going concern. However, in the short run there may be situations in which the company is willing to accept a lower price due to non-utilization of full capacity.
In the long run however, the management should select a target price that will cover both its variable and fixed costs and achieve target profit. There are basic methods for long run pricing decisions like cost plus or absorption costing, contribution margin and target costing.
Profitability: Profitability is the most important factor to be considered in directing a business venture. The only way of determining how the assets available to an entrepreneur should be put to use is evaluating the profitability of all possible ventures and selecting the highest paying one.
Profitability differs from profit in a very important way. Profitability is not measured in terms of money, but in terms of return on some asset. This means that a profit of $100 has nothing to do with profitability. Profitability measures how much output you can get from employing a certain amount of an asset and is usually measured in terms of ratio or percentage. Profitability is a very useful measure, in so far that it can make it easy and straightforward to choose between possible actions and ventures. In a perfect business world profitability is the only measurement that is needed for any economic being.
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