Markup (business)


Markup is the difference between the selling price of a good or service and its marginal cost. In economics, markups are the most direct way to measure market power: 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. The total cost reflects the total amount of both fixed 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 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.

Price determination

Profit

  • Assume: Sale price is 2500, Product cost is 1800

Markup

Below shows markup as a percentage of the cost added to the cost to create a new total.
  • Cost × = Sale price
  • Assume the sale price is $1.99 and the cost is $1.40
  • To convert from markup to profit margin:
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.
Comparing the two methods for discounting:
  • 75.00 × = 93.75 sale price with a 25% discount
  • 75.00 / = 100.00 sale price with a 25% discount
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 = W. Where μ is the markup over costs. This is the pricing equation.
W = F Pe. This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.
P = Pe F. This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.