What significant drawback does average-cost pricing have?

Average-cost pricing involves setting a product's price based on the average cost of production, including both fixed and variable costs, plus a markup for profit. A significant drawback of this strategy is that it fails to consider the firm's demand curve. This means that the price set might not align with what consumers are willing to pay, potentially leading to lost sales if the price is set too high or reduced profits if the price is set too low.

By not taking into account how many units consumers are willing to purchase at various price points, businesses risk mispricing their products. This misalignment can result in either excess inventory if prices are too high or missed revenue opportunities if prices are too low. Understanding the demand curve is critical for achieving the right balance between production costs and consumer willingness to pay, which is essential for maximizing profit and maintaining market competitiveness.