Business: Economics and Pricing Strategy

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1 (a) State the main difference between a skimming pricing strategy and a penetration pricing strategy. [2]
A penetration pricing strategy is a technique which involves setting a relatively low price initial entry price to attract customers and gain a foothold in a market whereas a skimming pricing strategy is a pricing technique in which a firm sets a relatively high price for a product upon launching. (b) Briefly explain why a business might choose to use a skimming pricing strategy. [3] A firm might choose to use a skimming pricing strategy for two main reasons. Firstly, they may try to maximise sales revenue before competitors come into the market with a similar version of the product. In addition, price skimming can be used to generate revenue in a short period of time so that further investment in the development of other products and projects can be made. 2 (a) Define ‘capital expenditure’. [2]

Capital expenditure is the money spent to buy, maintain or improve on business resources which can be used repeatedly overtime. For example, cost of painting new office premises, cost of repairs to plant and machinery and purchase of a motor vehicle. Capital expenditure is normally recorded as a fixed asset in the balance sheet. (b) Describe two external sources of finance that might be used to fund the capital expenditure of a business. [3]

Capital expenditure is normally funded by long term external sources of finance. Two examples are share issue and mortgage. A mortgage is a long term loan from a bank or other financial institution where the lender must provide some form of collateral such as land or premises to secure the loan. A mortgage is often used by small businesses because they cannot raise money from the sale of shares or debentures. Share capital- businesses can raise large amounts of money through the sale of shares for which shareholders receive dividends in order of priority. Issued share capital is...
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