Markup (or price spread) is the difference between the selling price of a

good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil. The specific meaning and etymology of the term and its ...

service Service may refer to: Activities * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, volunteer service for the benefit of a community or a ...

and its

marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is increased, i.e. the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it ...

. In economics, markups are the most direct way to measure

market power In economics, market power refers to the ability of a theory of the firm, firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In othe ...

: the extent to which a firm can influence the price at which it sells a product or service. Markup is often expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

. The total cost reflects the total amount of both

fixed Fixed may refer to: * ''Fixed'' (EP), EP by Nine Inch Nails * ''Fixed'' (film), an upcoming animated film directed by Genndy Tartakovsky * Fixed (typeface), a collection of monospace bitmap fonts that is distributed with the X Window System * Fi ...

and variable expenses to produce and distribute a product. Markup can be expressed as the fixed amount or as a percentage of the total cost or selling price. Retail markup is commonly calculated as the difference between

wholesale Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In ...

price and retail price, as a percentage of wholesale. Other methods are also used. Markdowns refer to the ability of a firm to hold the price it pays for an input below the input's

marginal product In economics and in particular neoclassical economics, the marginal product or marginal physical productivity of an input (factor of production) is the change in output resulting from employing one more unit of a particular input (for instance, t ...

Price determination

Profit

*Assume: Sale price is 2500, Product cost is 1800 :Profit = Sale price − CostFarris P.W., Bendle N.T., Pfeifer P.E. and Reibstein D.J. (2010). Marketing metrics : The Definitive Guide to Measuring Marketing Performance, Pearson Education. :700 = 2500 − 1800

Markup

Below shows markup as a percentage of the cost added to the cost to create a new total (i.e. cost plus). *Cost × (1 + Markup) = Sale price :or solved for Markup = (Sale price / Cost) − 1 :or solved for Markup = (Sale price − Cost) / Cost *Assume the sale price is $1.99 and the cost is $1.40 :Markup = ($1.99 / 1.40) − 1 = 42% :or Markup = ($1.99 − $1.40) / $1.40 = 42% *To convert from markup to

profit margin Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. Expressed as a percentage, it indicates how much profit the company makes for every dollar of revenue generated. Profit margi ...

: :Sale price − Cost = Sale price × Profit margin :therefore Profit Margin = (Sale price − Cost) / Sale price :Margin = 1 − (1 / (Markup + 1)) :or Margin = Markup/(Markup + 1) :Margin = 1 − (1 / (1 + 0.42)) = 29.5% :or Margin = ($1.99 − $1.40) / $1.99 = 29.6% A different method of calculating markup is based on percentage of selling price. This method eliminates the two-step process above and incorporates the ability of discount pricing. *For instance cost of an item is 75.00 with 25% markup discount. :75.00/(1 − .25) = 75.00/.75 = 100.00 Comparing the two methods for discounting: *75.00 × (1 + .25) = 93.75 sale price with a 25% discount :93.75 × (1 − .25) = 93.75 × .75 = 70.31(25) :cost was 75.00 and if sold for 70.31 both the markup and the discount is 25% *75.00 /(1 − .25) = 100.00 sale price with a 25% discount :100.00 × (1 − .25) = 100.00 × .75 = 75.00 :cost was 75.00 and if sold for 75.00 both the profit margin and the discount is 25% These examples show the difference between adding a percentage of a number to a number and asking of what number is this number X% of. If the markup has to include more than just profit, such as overhead, it can be included as such: *cost × 1.25 = sale price or *cost / .75 = sale price

Aggregate supply framework

P = (1+μ) W. Where μ is the markup over costs. This is the pricing equation. W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages. :Sub the wage setting into the price setting to get the

aggregate supply In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms ...

curve. P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.

References

{{Reflist Pricing Profit

External links