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.

Note

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.

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