If demand is elastic, a change in price causes an opposite change in total revenue. Inelastic demand results in a parallel change in total revenue when a product's price is changed. Analysis of demand, cost, and profit relationships the fourth stage of the process can be accomplished through marginal analysis or breakeven analysis. Marginal analysis combines the demand curve with a firm's costs to develop an optimum price for maximum profit. To do marginal analysis, marketers must first calculate fixed costs , average fixed cost , variable costs , average variable cost , total cost , average total cost , and revenue.
Marginal analysis is only a model.
It offers little help in pricing new products before costs and revenues are established. Breakeven analysis is important in setting price. To use breakeven analysis effectively, a marketer should determine the breakeven point for each of several alternative prices. This determination makes it possible to compare the effects on total revenue, total costs, and the breakeven point for each price under consideration. However, this approach assumes that the quantity demanded is basically fixed and that the major task is to set prices to recover costs.