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Theory of Price

The basic approach in most of the micro-economic theory (theory of the individual firm and its relation to other firms) defines the term optimum price as that price which yields the maximumprofits (excess of total revenues over total costs). Thus the basic assumption of the pricing theory is that the firm’s main objective is to maximise its profits. It also assumes that the firm takes into consideration the position of demand and cost functions and that the firm produces one product.

If a firm sell unlimited number of units, the total revenue line will be a straight line arrived at by TR= qp.
TR = Total revenue line
q = quantity of units sold
p = price per unit.

In most of the market situations, however, additional units can be sold by reducing the price.

This means that although the total sales revenue will increase as more and more units are sold, the increase in total revenue will decline gradually as sales increases.
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