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Optimal pricing – equations- ACCA Performance Management (PM)

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  1. Hi John, I can’t express how grateful I am for these lectures. I finally understand the straight line demand equation and able to use it to solve examples and I now understand the MR=MC equation and can use it with the P=a-bQ. Thank you so much!

    • The original formula should have been P = a + bQ , same as the equation of a straight line Y = mX + c. Then depending on its gradient it can be positive or negative. Here ‘b’ will always be negative as it is a downward slope.

  3. Dear John,

    As you presented the revenue bar as curve in the graph, i am struggling to understand how this curve is bending since the revenue will keep on rising if we keep on decreasing the price. However, at certain point profit curve is suppose to bend due to margin get exhaust. I may not be getting what is correct, please help me understanding that. Thank you

  4. Hello John,

    I was trying to apply the equations to solve the question in Example 2 (under Optimal pricing – tabular approach) to check my understanding.
    I worked it out that the price-demand relationship is P =$16.5 – 0.005Q, I am trying to find the optimal selling price by applying MC = MR .

    My question is, how do I derive MC using the information provided in Example 2?

    Many Thanks in Advance!

    Regards,
    Tim

    • You cannot be expected to produce an equation for the cost in the exam (and to get the marginal cost would require the cost equation to be differentiated, which is not in the syllabus either 🙂 )

      • Thanks John and well noted. The tabular solution gives us the total marginal cost which is not the marginal cost per unit and now I understand that this requires differentiation which is not in the syllabus.

        Just to confirm my understanding, based on the tabular solution, we identified that the optimal selling price p.u. is $15 for 300 units of demand. But If we were to use the equation approach (and say that the marginal cost or marginal revenue per unit was given), would the optimal selling price p.u. still be $15? (i.e. wouldn’t it be $14.xx for demand of 3xx units)?

        Thanks again!

        Regards,
        Tim

      • No it would almost certainly not be exactly $15. However if you are asked a tabular question in the exam (and it will always be clear as to whether it is tabular or equations) then we assume that the only possible prices there can be are those listed in the question. So the only answer to this example would be $15.

    • No it isn’t. When the extra revenue is more than the extra cost we have not reached maximum profit. When the extra revenue is less than the extra cost we have gone past the maximum profit. The maximum profit is when the two are equal.

  9. Thanks for your explanation on why MR = MC at Maximum profit.
    I was studying same topic somewhere else where was told to assume MR = MC without any explanation and never could figure out why that was the case.

    Thanks again for another brilliant lecture John.

    Regards
    Jas

  10. Dear John,
    How are you?
    I hope you are great.
    Thank you for your explanation, I have a question related to the graph which presents the price demand relationship I think we have to plot the price on x-axis and the demand on y-axis because the change in demand is dependent on the change in price this according to my understanding is that right? If wrong so what’s the right and why? Thank you in advance.

  11. Hello Mr. Moffat, I have a question regarding example 6, where in the answers ‘a’ is said to equal 120. But according to my calculation it is suppose to be 102 since ‘a=100+(0.001*2000)’. This got me confused and would really appreciate your assistance.

    Thanks in advance.

  13. Sir,

    1) Can we say that as per Example 5 question, we can set the selling price between current $30 to $35 for 1500 unit demand (P=50-0.01 x 1500) that can be got maximum contribution?

    2) In the practice, current selling price $30 come from cost plus pricing approach?

    Thanks.

    May

    • Sir,

      To be confirmed for my understanding in the Pricing chapter (haven’t go through yet pricing strategics video)

      To calculate SP p.u for related demand at max profit, we have to know base information below.
      1) current SP p.u which calculated cost plus approach
      2) demand (how much we sell in future)
      3) Must have experience that our produce is how sensitivity to change in price and demand in the market .

      Many Thanks.

      May

      • Sir,
        May I ask you one more question, as per example 5 and 6, how do double check that is maximum profit with this selling price?
        If I am substitute, 1499 with SP 36, contribution is higher than max contribution at 35 SP.

        I do apologize for keeping asking question again.

        Many Thanks.

        May

    • First question:

      1. No. For demand of 1,500, the selling price can only be $35 from the price demand equation.
      2. No, you cannot assume that. Where it comes from is of no relevance.

      Second question:

      Correct.

      Third question:
      For demand of 1,499, the SP will not be $36 – see the price/demand equation. Highest total contribution is when demand is 1,500 and SP is $35.

  14. Hello Mr. Moffat,

    In the calculation of b in the price equation we must not take into account the signs (plus and minus), is that right? Because if for example the price was 220 and the demand was 5000 and the price drops to 200 and the demand rises to 6000 if we make the calculations by the book we get: -20/1000=-0.02 or 20/-1000=-0.02. And if we put this to the demand equation we will get 200=a-(-0.02×6000).
    Could you please clarify on this?

    Thank you in advance

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