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Nick says

Can you please help me.. Example 6

P = a- bQ

b = 0.001

a = 120

P = 120 – 0,001Q

Then

120- 0,002 Q = 5, how we find 0,002?

Thak you for youe help.

John Moffat says

Using the formula for MR on the formula sheet! 2b = 2 x 0.001 – 0.002

(I do suggest that you watch my free lectures)

Nick says

Thank you. Sorry, i missed it in the notes.

John Moffat says

No problem 🙂

DADA says

Thank you for this lecture, it is advisable that I go over it again, in order to imbibe a better understanding of it. Kudos to the lecturer, bravo to ACCA!!!

John Moffat says

Thank you very much for your comment (although I am not sure why you write ‘bravo to the ACCA’ , because they do not finance this website 🙂 )

Nwanyioma says

You are a ‘God sent’. May you live long in sound mind.

The solution to June 2011 second question is different from mine and I don’t understand it.

Instead of ‘MR = 750 – 0.02Q’ I saw ‘MR = 750 – 0.03Q. Where is that 3 coming from?

John Moffat says

b = 15/1000 = 0.015

In the marginal revenue formula, 2b = 2 x 0.015 = 0.03

Nwanyioma says

God bless you real good.

John Moffat says

You are welcome 🙂

jackymunyi says

What’s the definition for complementary products?

Igrar says

Hello, Sir.

i am sorry if this question hae asked beore.

but it is ok if i will differentiate in exam and show it as a workings?

John Moffat says

In Section A it doesn’t matter because nobody will look at your workings.

In Section B it is OK because all you will be doing is arriving at the formula for marginal revenue that is given on the formula sheet anyway 🙂

(and you must show that you know the MR = MC cost rule)

Igrar says

Thank you!

John Moffat says

You are welcome 🙂

nelvin says

Dear Sir,

Could you pls tell me why we calculate T.R & T.C ? As M.R formula will be given in exam and M.C is available in example. Without calculating T.R & T.C we can get the answer. Do we need to show calculation for T.R & T.C for a must or we can skip it ?

Kindly correct me if i am wrong.

Thanks for your valuable time and efforts.

John Moffat says

You only need to calculate total revenue and total cost if the question asks for it (which it might).

The reason for showing it in the lecture is to make sense of why the maximum profit occurs when MR = MC. The Paper F5 examiner tests that you understand what is happening – not simply that you know how to use a rule.

nelvin says

Thank you Sir for reply.

John Moffat says

You are welcome 🙂

accakeisha says

I realize that example 3 was not explained. …or did i missed out on it?is it because we wont be tested on price elasticity of demand?

John Moffat says

It could be tested but there is no lecture. The answer in the lecture notes should explain it enough.

jackymunyi says

I realized this too, thanks

John Moffat says

You are welcome 🙂

Jenna says

Sorry, where is the answer for this? The lecture notes only show the PED formula, but what is the actual answer for example 3?

Thanks.

John Moffat says

Answers to all the examples are in the lecture notes!

Have a look at the contents page and you will see that they are at the end of the notes.

Shivang says

Hi John, to work out the maximum profit on example 6, I did Total Revenue (PxQ) – Total Cost (100000+5Q). I get the same answer, but just wanted to clarify that this is in fact a suitable way to calculate the maximum profit?

Thanks in advance

John Moffat says

That’s fine – it does not matter how you calculate it 🙂

Vita says

Hello, could you please shortly explain the difference between Product-line pricing and Complementary products?

The lectured example of razors sounds to me more like the pricing of complementary products.

This is an example illustrating my understanding of Product-line pricing: Toyota and Lexus are produced by the same company, but Lexus is more expensive than Toyota as it is supposed to have higher quality (more luxury). So Lexus is priced higher for richer people and Toyota is priced lower for poorer people. And not necessarily the same person will buy both cars (although it is possible) as they are not complementary goods (should not be used together).

John Moffat says

What you say is correct except that rather than comparing two different models, better is to compare different models of the same car – one with more features and a higher price, and one with fewer features at a lower price.

Stylianos says

Hello Sir,

I am confused in Test 1. Total cost is 26 and the company wants to make GPM of 20% using absorption cost. Why B and not C? It is not clear for me even in the answers.

Thank you very much.

John Moffat says

A gross profit margin is the profit as a % of the selling price. For every 100 selling price, the profit will be 20 and therefore the cost will be 80.

If the cost is 26 then the selling price will be 100/80 x 26 = $32.50

GPM’s are always profit as a % of selling price; mark-ups are always profit as a % of cost.

Stylianos says

Great explanation and totally clear. Thank you very much!

John Moffat says

You are welcome 🙂

Mashal Khan says

Did we miss price elasticity of demand? Is it not in the course ?

John Moffat says

It isn’t lectured, but it is in the lecture notes and should make sense from there.

khan says

I am realy thankful to you sir, you make this topic too easy for me to understand

THANKS once again

John Moffat says

Thank you 🙂

nigelc says

Makmuqul, the equation is the derivative (differentiation) of the Total Revenue (TR) formula.

Selling Price P = a – bQ

Total Revenue, TR = PxQ = (a – bQ) x Q

= aQ – bQxQ

If we differentiate TR (ie find dTR/dQ) that last equation, we get a – 2bQ.

That is the marginal revenue. That is, the derivative of TR gives the marginal revenue (MR) or the rate of change of revenue for each unit increase in quantity.

So, P is the selling price.

TR = PxQ

MR = derivative/differentiation of TR = a -2bQ.

John Moffat says

Fine (and I go through this in the lecture and so I don’t know why you have repeated it), except that differentiation is explicitly not examinable in any of the ACCA exams.

That is why the formula for the marginal revenue is given in the exam.

maqmukul says

Dear Sir

I am confused about MR=120-0.002Q

John Moffat says

The formula is given on the formula sheet, once you have calculated a and b for the price demand equation.

Righan says

is that (50Q)’-(0.01Q^2)’=50-2*0.01Q, so it equals 50-0.02Q .right?

John Moffat says

Yes – it is using the formula on the formula sheet.

Once you have the price demand equation and therefore know the values of a and of b, then you put the same values in the marginal revenue formula.

Mohamed says

hi sir,

Are the exchange rates of a currency in different countries one of the kind of price discrimination when they are sold by fin.institution with a profit?

John Moffat says

No, because it is not the company who determines the exchange rates. Price discrimination is when they deliberately charge different prices, irrespective of the exchange rates.

Mohamed says

thank you sir.

John Moffat says

You are welcome 🙂

raid says

Hello there, Mr. Moffat, I got a question related to the test that is at the end of chapter 7.

Question 1 asks about the selling price of the product, my answer was as follows:

10+8+3+5=26*120%=31.2 which gives the answer C. My answer was based on the assumption that it’s profit margin, since the company wishes to make a gross profit margin of 20%.

But in the answers behind, your solution was based on the assumption as if it’s a mark up which gives the answer B!

Could you please explain how did you reach to that assumption?

John Moffat says

In future it is better if you ask this sort of question in the Ask the Tutor Forum rather than as a comment on a lecture.

The answer is correct.

A gross profit margin of 20% means that the profit is 20% of the selling price (and therefore the cost is 80% of the selling price).

What you are doing it treating it as though it is a mark-up of 20% which would mean the profit was 20% of cost.

It will help you to watch the Paper F3 lecture on mark-ups and margins.

raid says

Got it, thanks Mr. Moffat.

sunday says

Is understood. Thanks

Jonny says

In example 6 where you work out the 1st equation to get P=120 – 0.001Q I dont not understand why, in the next step, to calculate Maximum profit, you then set out the equation as 120 – 0.002 = 5.

Why 0.002 when in the previous equation b = 0.001?

John Moffat says

Because it is the marginal revenue equation. I do explain this in the lecture, and also the formula is given on the formula sheet.

aliimranacca007 says

i need lecture for price elasticity of demand,,because i enjoy your lecture too much ..i hate BPP text book.

John Moffat says

I probably will record a lecture – but only when I have the time.

However it is explained well in the lecture notes (and the lectures and the lecture notes go together – using just one or the other is no good)

desola says

thank you very much sir, am preparing for f5 september 2015 diet and i realy find your lectures helpful. please do i need to still use my bpp exam kit as the kit is too bulky and i go to work everyday or can i just use open tution lecture note and will be sure of passing brilliantly by Gods grace.

John Moffat says

You must use your Revision Kit because it is vital to practice as many exam standard questions as possible.

The lectures will give you the knowledge you need, but you need the Revision Kit for practice.

aliimranacca007 says

Dear sir why you not explain price elasticity of demand?

Josephat says

love it, thank you for the lectures.

John Moffat says

I am pleased that you like them 🙂

oni says

thank you for the lecture, however there is something on example 6 i don’t understand the selling price was not stated either to increase or reduce

John Moffat says

In pricing questions we always assume that the price/demand relation ship is linear.

Because of that, in this example, if the price goes up by $2 then the demand will fall by 2,000 units, but also, if the price goes down by $2 then the demand will increase by 2,000 units.

vttrang says

Sir, is it also that revenue is maximised when marginal revenue = 0?

Thanks in advance.

fahim231 says

hello sir

I just noticed on example 6 you did not work out the formulas for total revenues or even total cost…….Does this mean you do not need these to derive at the answer? You can simply work it out from the marginal revenue = marginal cost formula?

Thanks in advance

John Moffat says

Although you could be asked to calculate total revenue and/or total cost, if you are simply asked to state which selling price will result in maximum profit then all you need to do is use the fact that for the optimum then it is when MR = MC.

amg says

Very useful ! Thanks a lot

abdul says

Excellent lecture being given.thank you

Rachel says

Many thanks for these brilliant lectures. I have been studying one per evening and am finding ACCA brilliant (this is my first module) thanks to your website.

A quick question, was example 3 of chapter 7 covering price elasticity of demand omitted from your lecture? I haven’t taken any notes on it. Probably my mistake!

Thanks again.

John Moffat says

You are correct – I missed out example 3 🙁

However the free Lecture Notes (and the answer at the back) should make it clear.

Rachel says

Thank you, John 🙂

kangwajk says

Thanx so much for a very elaborate lecture

ifeoma says

Thanks for the lecture. However, I have an issue. Going with the TR equation of TR = (A-BQ)Q, slotting in the figure of 57500 for quantity as derived, a as 120 and solving , we do not get the correct TR. Why is it so

John Moffat says

If you fill in the figures for Q, a, and b, then the total revenue is 3593750 which is the same as Q x selling price (57500 x $62.50).

Why do you say that this is not the correct total revenue?? (Are you sure you are not confusing it with the total contribution in the answer?)

ifeoma says

Sir, if a= 120, b= 0.01 and q= 57500. When I solve, I don’t still get 3593750.

ifeoma says

Sorry sir, I got it now. Was using 0.01 as b instead of 0.001.

Thanks

Kerri - Ann says

Good Day John,

Must say that i am happy to be back with you again. I was successful in F2 thanks to opentuition.

However, I am very confused with how we get the Marginal Revenue. (I did not do differentiate)

John Moffat says

As I explain in the lecture, the formula is given on the formula sheet – you do not need to be able to differentiate.

Majestic says

Great lecture as always! .

Sir i have a question. How do you see the usefulness of the price-demand equations as regards to the pricing strategies in theory and real life ?.

Cheers : )

richardrobinson50 says

i notice from the examples 5 and 6 that contribution per unit is the same as “bq” from the equation (p = a – bq)

John Moffat says

Well spotted 🙂

That will always be the case at the levels of P and Q that give maximum profit.

However, don’t use that fact in the exam 🙂

sunday says

Thanks alot.

John Moffat says

You are welcome – I am please you are finding the lectures useful 🙂

ayeodele says

very understandable thank sir

Samoar says

A tonne of thanks , sir!

rawliea05 says

You have provided an understanding to Pricing. My heartfelt thanks.

zahreddine says

Thank you sir for the great job you’re doing.

Could it be possible that variances in price and demand are not given?

If yes, how should we figure them out?

John Moffat says

I am not sure exactly what you are asking.

You are usually not given variances – the whole point is for you to calculate the variances!

zahreddine says

In example5, for instance “a reduction in selling price of $1 will result in additional sales of 100 units”. what should we do in the case where we don’t have this data?

John Moffat says

Sorry – I completely misunderstood you 🙁

If you are required to produce the price/demand equation, then you have to be given that data in one form or another.

maas says

Thank you very much. 🙂

maas says

Dear sir,

Ex 06, to calculate the profit, which analysis should we use, Key factor analysis or throughput accounting, thank you

John Moffat says

Neither!

Key factor analysis and throughput accounting are only relevant when there is a limit on the resources available and several products to choose from. None of those factors are relevant here.

Once the demand and associated selling price have been calculated, all the information is available to calculate the profit.

maas says

Sir,

(Ex 06, when calculating contribution per annum you deduct variable cost from selling price and then deduct the fixed cost. why do we deduct both variable cost and fixed O/H to calculate the profit. please help sir

John Moffat says

Profit is revenue less all costs.

Contribution is revenue less variable costs.

Profit is contribution less fixed costs.

Variable costs are those where the total changes with the level of production. Fixed costs are those there the total stays the same for all levels of production.

stellaeliud says

Thank u for the lecture.

Amit says

MR = dTR / dQ ; Here I understood that algebra involved to arrive at the answer. But I am unable to understand the logic behind (MR = dTR / dQ). Please kindly explain.

John Moffat says

The marginal revenue is the extra revenue that will be generated from selling one extra unit. Because the total revenue is a curve, the marginal revenue will fall with higher demand.

As you will know from our Course Notes and my lecture, you cannot be asked to differentiate in the exams – it is excluded from the syllabuses throughout the ACCA exams.

That is why the equation for the marginal revenue is given on the formula sheet.

Benedict says

Your lectures are concise and succinct, and I have benefited immensely. Thank you very much for everything, sir.

John Moffat says

Thank you 🙂

amin22 says

hi , May i know where is the marginal revenue equation is given in question number 6 ?

John Moffat says

The formula for the marginal revenue (MR) is given on the formula sheet that you get with the exam.

mahoysam says

Kind of having a hard time with the formulas bit of the lecture, but it is not because they are not clearly explained, I guess I just need to practice more.

I am just surprised that as I am already taking a course somewhere else, there was no mention of these formulas on the topic of pricing, they only taught basic things plus the pricing strategies, I wonder if pricing is not that common in the exam and that’s why they didn’t go in deep as it is explained in here?

John Moffat says

Pricing does get asked every three or four exams. I am surprised if you are not being shown the formulae since you are given them in the exam on the formula sheet.

mahoysam says

Oh! so it is actually a common topic. I saw the formula yet there was no great explanation about it, I also came across it obviously in F2. Also there was no talk whatsoever on MC and MR and all of that. I am glad I checked here for this extra bit.

John Moffat says

It is no longer examinable in Paper F2, which makes it slightly more likely at F5 (although it is not so often at F5)

mahoysam says

May I ask when was it removed from the F2 syllabus? Because I took my F2 exam last December so it is not long time back, I wonder if they taught it to me while it was out of the syllabus already!!!!!

mahoysam says

Also I have another question and I am sorry if I am asking too many questions, but i would like to know if the price elasticity of demand is within the F5 syllabus, will I be expected to calculate the elasticity of products and so? I do have a basic idea about it from F1 and I believe I could answer a writing question on it as long as it is basic question but I am not sure if it is within the syllabus and if I am supposed to be aware of it. I am asking this because I found one question on it within my kit.

Thank you very much and apologies for any disturbance.

John Moffat says

Yes – it is in the syllabus 🙂

mahoysam says

I guess I have been studying the things which are not in the syllabus and leaving the topics included in the syllabus !!!

Thank you for all the clarifications!! 😀

florencenkrumah28 says

very in-sighting. God bless you

ruthany says

Nice one. Open Tuition Rocks!

fzinyemba says

Brilliant lecture thank you. i however am struggling to find past exam questions to do some more exercises any ideas?

I only found Qs in the dec 2007 q1 .

Tks

irum says

can any body help me..is pricing strategies(cost plus price,marginal cost plus price) are also included in this chapter…..in some books its included?

John Moffat says

Cost plus pricing (full cost + and marginal cost +) is in the syllabus and is (of course) covered in our notes and lectures on here.

(It is more of a policy than a strategy, but that does not really matter.

poppyt says

Thank u – brilliant

aliki1983 says

by examles it is so much easier to remember.

putisaduo says

Very clear illustration, thanks very much tutor!

mustapo says

I really enjoyed the lecture and the lecturer’s way of explanaing things but still want a detail explanations on Price elasticity of demand. The ones you taught were well understood. Thanks.

lynley says

good explanation

ghani1 says

very very good Lecturer.

bayigga says

Well explained…. thanks OT

esthernky says

@bayigga, really