Tag Archives | product

Supply and Demand Elasticity

See Also:
Economic Indicators
Balance of Payments
Stagflation
The Feds Beige Book
What are the Twin Deficits?

Supply and Demand Elasticity

Supply and demand elasticity is a concept in economics that describes the relationship between increases and decreases in price and increases and decreases in supply and/or demand. We have described it in greater detail below.

Price Elasticity of Demand Definition

In economics, demand refers to customers’ need or desire for a given product or type of product and their eagerness to purchase that product. The more customers want a certain product, the more demand there is for that product. Less desirable or necessary products have lower demand in the marketplace.

What is elasticity of demand? Price elasticity of demand refers to the degree to which demand is influenced by changes in price. Basically, price elasticity of demand describes consumers’ sensitivity to changes in price. For example, if the price of a product suddenly goes up, broadly speaking, fewer people will buy it because it is more expensive. Perhaps people can no longer afford the product, or perhaps they feel the product costs more than it is worth. Regardless, to some extent, at least academically speaking, when prices rise, demand falls.

If a slight price increase causes a large decline in demand, price elasticity is high. Similarly, if a slight price decrease causes large increase in demand, elasticity of price is high. On the other hand, if a large price increase is required to cause any decline in demand, price elasticity is low. And if large price decreases are needed to cause any increase in demand, elasticity of price is low.

In sum, if a small price change causes a dramatic change in demand, price elasticity is high – consumers are highly sensitive to price changes. If small price changes cause little or no effect on demand, and substantial price changes are needed in order to see any effect on demand, then price elasticity is low – customers are less price sensitive.

Elasticity of Supply

In economics, supply refers to the availability of a particular product in the marketplace. If a particular product or type of product is widely available in the marketplace, that product is amply supplied. If there is a dearth of a particular product or product type in the marketplace, that product is in short supply.

Supply is also related to price. When the price of a product rises, supply will increase. This is because the makers of the product want to maximize profits by selling as much of the product as they can while prices are high. This will flood the marketplace with that product, leading to an eventual overabundance of the product. When products are too abundant – when there is too much supply available – prices fall. If everyone in town has the same red hat, you won’t be able to charge very much for yours.

If you want to find out more about how you could utilize your unit economics to result in profits, then click here to download the Know Your Economics Worksheet.

supply and demand elasticity

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Proforma Invoice Example

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Proforma Invoice

Proforma Invoice Example

For example, Juan distributes products to and from Mexico. Juan’s business meets all legal specifications that would allow him to import his products into the United States. His company, a fleet of 18 wheel trucks, crosses the border several times each day. In an effort to make the importing process as smooth as possible, Juan must make sure to carefully document his shipments to meet the regulations of both governments. Failure to do so could lead to a slowing or complete halt in the capturing of profit. Clearly, Juan must do anything he can to avoid this.

Juan is worried about a recent shipment. The customs agents of Mexico have informed him that his shipment may be delayed for inspection. This will cause problems in the deal that Juan has made. He must think of a solution to help speed the process. Juan needs to find a way to smooth over the red tape and allow his business operations to continue as normal.

Create a Proforma Invoice

Juan and his business advisors decide that the best course of action is to create a proforma invoice. He has his assistant write an exceptional quality proforma invoice, vs quotation made off company letterhead, for this project. This way his company will come across as the reliable and trustworthy business that it is.

When the customs agents receive this proforma invoice, they are put to ease. They still spend some time inspecting the load but release it after just a few hours, rather than holding it over for a number of days. A simple document has solved a problem that effects Juan’s entire company. Juan rests easy that night knowing he has pleased his customers.

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

Proforma Invoice Example

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Proforma Invoice Example

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Proforma Invoice

See Also:
Proforma Earnings
Proforma Financial Statements
Credit Letter
Balance of Payments
Proforma Invoice Example
Product Cost

Proforma Invoice Definition

Proforma invoice, defined as an invoice which is sent to a customer before they receive product, has more than one use. For customers it serves two main purposes. First, a proforma invoice allows customers to see estimates on what their invoice will be: product cost, shipping cost, processing fees, and more. Second, the proforma invoice format is a record to be presented to customs agents when attempting to import or export items.

Proforma Invoice Meaning

A proforma invoice, commercial invoice compared, means an invoice which is made before the sale has actually taken place. When distinguishing a proforma or performa invoice an understanding of latin may be of use: pro generally means before, while per generally means after the fact. This is the main difference between a proforma vs commercial invoice.

Often times, when importing or exporting products, customs agents want to understand the deal taking place. They have many reasons for this, to have a document to later confirm the shipment or to create an expectation of what should and should not be shipped with a product. The proforma invoice, or performa invoice for that matter, gives customs agents an understanding of shipped contents, shipping time, value of the shipment, and more.

On the other hand, clients appreciate an estimate of total cost when receiving shipment. This is akin to receiving an estimate prior to work at the car shop. This document can convey a sense of professionalism to the customer.

Proforma Invoice Example

For example, Juan distributes products to and from Mexico. His company, a fleet of 18 wheel trucks, crosses the boarder several times each day. Juan must make sure to carefully document his shipments to meet the regulations of both governments.

But a recent shipment worries Juan. The customs agents of Mexico have informed him that his shipment may be delayed for inspection. This will cause problems in the deal that Juan has made. He must think of a solution to help speed the process.

Juan has his assistant write an exceptional quality proforma invoice, vs quotation made off company letterhead, for this project. This way his company will come across as the reliable and trustworthy business that it is.

They are put to ease when the customs agents receive this proforma invoice. They still spend some time inspecting the load but release it after just a few hours, rather than holding it over for a number of days. A simple document has solved a problem that effects Juan’s entire company. Juan rests easy that night knowing he has pleased his customers.

For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Proforma Invoice

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Proforma Invoice

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Research and Development

Research and Development Definition

Research and development (R&D) in business refers to activities geared towards new product development or current product improvement. It typically involves conceptualizing and designing new products and then tailoring them to meet the needs of the target market. R&D is often a line item on a company’s income statement. Technology and pharmaceutical companies often have comparatively high research and development spending because these industries are very research-intensive. Substantive spending on R&D can also be a sign that a company is growing or expanding.

Accounting Research and Development

In accounting, there is some controversy over whether research and development spending should be considered an asset with future benefits for the company or whether it should be expensed in the period when it is incurred. Some claim that because R&D is part of the process of creating new products, it should be considered an asset with future benefits to the firm and expensed when the new products are eventually sold. Others claim that research and development is a regular operating expense, and it should be expensed in the period in which it is incurred.

In the U.S., the Financial Accounting Standards Board (FASB) solved the dilemma by requiring all companies to expense R&D in the period incurred. This is the rule according to GAAP.

When investing in research and development, be the trusted advisor your CEO needs and guide them through this process. Learn how you can be the best wingman with our free How to be a Wingman guide!

Research and Development

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Research and Development

See Also:

How to Estimate Expenses for an Annual Budget
Capital Budgeting Methods

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Product Pricing Strategies

How you price your products and services can have an impact on your profits. Check out the following video for our product pricing strategies:

Product Pricing Strategies

The following are descriptions of standard pricing strategies.

Cost-Plus Pricing

Pricing products and services by applying a certain standard markup percentage on top of the total cost of producing the product or service.

MSRP (Manufacturer’s suggested retail price)

Retailers price products based on a suggested price from the product’s manufacturer, which is above the wholesale price paid by the retailer.

Low Price, High Volume

Reducing prices to sell more product. The idea is to compete on price and increase profits through selling a larger volume of products, though margins will be less.

Premium Pricing

Increasing prices for products and services based on an improvement in product quality, and/or additional features and services provided. The idea is to increase profits through selling products and services at higher margins, even though volumes may be less.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Product Pricing Strategies

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Product Pricing Strategies

See Also:

Product Costs vs Period Costs
Segmenting Customers for Profit

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Product Life Cycle

Product Life Cycle Definition

A product life cycle, defined is the period from when a product goes through its initial specifications and research to the withdrawal of that product from the market. There are five product life cycle stages.

Product Life Cycle Meaning

The product cycle stages are as follows:

Research and Development

This is the phase where market research as well as the design plans for a product are initiated. Patents are established for the product during this phase to protect the product from competition. Production facilities might also be developed during this stage so that mass production can take place. The company might also establish its logistics for raw material suppliers and retailer customers.

Introduction and Growth

Here the company starts its advertising campaign as the product is sent out into the market. The pricing and promotion of this product are essential during this phase to ensure the product’s success.

Maturity

In this product life cycle the company will increase its production and logistics network according to demand. A company will also broaden the audience that it is promoting to as the product becomes more popular during this product cycle.

Decline

As the product loses popularity a company has generally three options. The first choice is for the company to offer the product at a reduced price. The second is for a company to add new features or revamp the style of the product. The decline stage is the last option. Eventually, this stage will move into the elimination of the product or the abandonment stage.

Abandonment

Here the entire product line is discontinued. A company liquidates all of the remaining inventory. If the product contained special facilities, then the company will liquidate those as well. Then, realize the salvage value for all equipment. This stage represents the complete end of that product and everything associated.


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Product Life Cycle

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Product Life Cycle

See Also:
Business Cycle
Cash Cycle
Company Life Cycle
Operating Cycle Analysis
Accounting Cycle

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Product Costs

See Also:
Economic Production Run (EPR)
Product Pricing Strategies
Bank Charge
Completed Production Method
Inventory Shrinkage

Product Costs Definition

Define product costs as the total costs of creating products, is an essential factor in the success of a manufacturing business. Some of these components include all direct costs, from raw materials to labor and even transportation, included in creating a finished product ready for sale.

Product Cost Explanation

Explain product cost as the entire cost spectrum for a product, can have varying levels of complexity. The product cost concept will vary greatly depending on the type of product produced.

For a simple injection-molded plastic product, product cost per unit will include raw plastics, transportation from the raw material maker to the manufacturing plant, labor, energy used by manufacturing machines, and more.

For a software product maker, a product cost breakdown will include development labor, energy, and any other costs directly associated with making the piece of software.

Any business which makes products has a product cost. To assure efficient and profitable systems it is in the best interest of the business owner to monitor these costs. From this information a company can solve internal problems and ultimately increase the company’s bottom line (Revenue – Costs = Profit).

Product Costs Formula

No single product cost formula seems to exist. More, it is the combination of all of the costs which add up to create a product. This can widely vary based on industry, production method, and more.

An industry average may be available to perform product cost analysis as compared to standard practices. This way, a company can see if they are meeting common standards. From here a company can attempt to become more efficient than the industry standard by enacting some best practices.

Product Cost Example

Sterling is the owner of a web development company. Though he works with intangible assets, mostly, he still has a product cost equation. His product cost effects his bottom line as much as any manufacturing firm.

On average, Sterling charges clients $10,000 for a perfect web application which is ready to be deployed. In comparison, it usually costs him about $3,000 to create one of these applications. Sterling would like to reduce this in order to increase company profits.

Sterling looks at his main factor: labor. By hiring better developers Sterling will slightly increase labor costs but also expects the developer to produce 10% more in one hour than his current employees.

On the other hand, by purchasing new development software Sterling expects to also increase average worker productivity by 10%.

Choosing An Option

In this example, Sterling will choose an option based on his preferences. Rather than interviewing an entire new team he opts for the new system. This way he will not have to waste time, energy, and create a hassle for his current employees. He chooses this option after speaking with his CFO, who informs him that the cost of the new system will be virtually the same as the cost of hiring new employees. Specifically, the software will cost a total of $160,000. He will have to spend $159,500 on project manager time, new employee training, and processing.

Sterling is confident that he has made the right decision. He looks forward to his new software and the happy faces of the employees he appreciates.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Product Costs

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Product Costs

 

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