Markup is the ratio between the cost of a good or service and its selling price. It is expressed as a percentage over the cost. A markup is added onto the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.
Below shows markup as a percentage of the cost added to the cost to create a new total (i.e. cost plus).
Another method of calculating markup is based on percentage of cost. This method eliminates the two-step process above and incorporates the ability of discount pricing.
Comparing the two methods for discounting:
These examples show the difference between adding a percentage of a number to a number and asking of what number is this number X% of. If the markup has to include more than just profit, such as overhead, it can be included as such:
P = (1+?) W. Where ? is the markup over costs. This is the pricing equation.
W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.
P = Pe(1+?) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.