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We can understand the situation by this example.
Imagine you are a shopkeeper. From an agent you buy 100 toys. Each cost $10. So you will pay 100*10= $1000 to buy the toys. Then you mark the price of a toy as $14 and place it in the shop. Since the price is too high no one buys them.
So you will give a discount or a decrease in price. Let us say you mark the discount price as $12. Then we imagine that all the toys will be sold. So you will get 12*100 = $1200. Your cost is $1000 but you earned $1200. So here even though you gave a discount you have a profit.
Let us say even for $12 no one will buy them. Then you realize that you can’t keep them in the shop forever and you decide to sell them $8 each. So when you sell all the toys you will get 8*100 = $800. You cost $1000 for buying them but by selling you earned only $800. So you have a loss even though you gave a discount.
In the first instance you will get a profit but it is not the profit you expected. You expect 14*100 = $1400 by selling toy. But you got only $1200. In that case it’s kind of a loss. Actually it is a loss of profit margin.
It depends on what base the shopkeeper is discounting off of. If he is discounting off the normal retail price, what usually happens is that the new sale price is still above the wholesale price, thus earning a profit on that item (although until fixed costs are covered, there really is no profit). If the shopkeeper discounts off the wholesale price, he takes a loss on that item. Usually, in this case, the shopkeeper is hoping that the customer buys other items while in the store and that the sale of these other items more than make up for the loss the shopkeeper is taking on the discounted item. In this case, the discounted/sale item is called a loss leader.
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