Finance and the Economy · Seminar 6 · Pricing decisions and profit maximisation

Mark-up and margin are not the same number

Mark-up is profit as a share of cost; margin is the same profit as a share of price. Set a cost and a price and read both; the curve shows how any mark-up converts into a margin. Questions 1 and 2, from Business Economics (Mankiw, Taylor & Ashwin, ch. 16).

Pick a question or set cost and price yourself. The point on the curve is your current mark-up and margin.
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Profit per unit

Mark-up (on cost)

Margin (on price)

Formulas

Two conversions worth memorising. Price = cost × (1 + mark-up). Price = cost ÷ (1 − margin). So margin = mark-up ÷ (1 + mark-up) and mark-up = margin ÷ (1 − margin). A margin can never reach 100%, however large the mark-up, because cost is always some share of price.

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