The interaction of economic ordering quantities and marketing policies

A general net profit model is developed consisting of the difference between the gross profit and the total inventory costs. This model considers that the demand is a function of the selling price, that the selling price depends on the pricing policy and on the unit cost which in its turn varies according to the order quantity. It is shown that the correct treatment of inventory problems is that which considers its interaction with problems of pricing since the obtainable net profit can be increased over the amounts achieved when inventory problems were regarded as independent subsystems. Further it has been found that there exists a critical demand elasticity such that the preferable pricing policy is different for prevailing elasticities above this value than for elasticities below it.