What significant drawback does average-cost pricing have?

Average-cost pricing is a method where a firm sets prices by calculating the total costs of production and dividing them by the number of units produced. While this method can provide a straightforward way to ensure costs are covered, a significant drawback is that it fails to consider the firm's demand curve.

Understanding the demand curve is crucial for pricing strategy because it reflects consumers' willingness to pay at different price points. By ignoring this aspect, a firm might set a price that does not align with market demand. This can lead to either lost sales if the price is too high or reduced profitability if the price is too low, as it does not account for how many customers would actually purchase the product at various price levels. Therefore, while average-cost pricing might cover costs, it could lead to poor market performance if demand is not adequately factored into the pricing strategy.