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.

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

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?

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)?

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.

Can you explain again why profit maximization is when MR = MC. At 14:40, you said it won’t be worth to drop the price anymore. But the MR=MC point in further down in the graph.

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.

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.

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.

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.

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?

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 .

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.

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.

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?

szilvike1 says

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!

kschamoo says

Hello Sir. When finding ‘a’ in optimal pricing equation it is p+bQ. But the ‘b’ is -0.0004? ‘a’ should have been 12+(-0.0004*16000)?

kschamoo says

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.

kamran.khan says

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

kamran.khan says

Sorry John, i got the answer myself. I actually watch the video again and sorted this out.

John Moffat says

Great 🙂

ty0311 says

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

John Moffat says

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 🙂 )

ty0311 says

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

John Moffat says

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.

ty0311 says

I am clear now. Much appreciated it John!

John Moffat says

You are welcome 🙂

rgbstatic says

1 doubt, total revenues keep increasing (with reference to graph), that means the curve which you drew was the marginal revenue curve (@13:23) right?

John Moffat says

No it is not. The curve is the total revenue and the line is the total cost.

theluthelu says

Can you explain again why profit maximization is when MR = MC. At 14:40, you said it won’t be worth to drop the price anymore. But the MR=MC point in further down in the graph.

John Moffat says

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.

theluthelu says

If MRMC=Loss, why is MR=MC max profit? Shouldn’t it be breakeven point? So no profit and no loss?

theluthelu says

MR>MC=Profit, MR<MC=Loss*

John Moffat says

Look again at the graph. When MR = MC we are at the highest point on the graph and that is when we are getting maximum profit.

Jerry1999 says

Could you check my final answer for Example 6

Q = 57500

SP = 62.5

Maximum Profit = 3206250

John Moffat says

It is correct (although all the answers to examples are printed in our free lecture notes!)

Jerry1999 says

Thank you very much. I noticed the answers to examples only after you said. Thank you.

John Moffat says

You are welcome 🙂

jassinghuk87 says

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

7fsa says

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.

John Moffat says

It doesn’t matter which you put on which axis – it is only to illustrate (and you cannot be asked to draw any graphs in the exam).

7fsa says

Thank you sir.

olind says

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.

John Moffat says

a = 100 + (0.001 x 20,000)

(not 100 + (0.001 x 2,000) )

olind says

Thank you for clearing out my confusion. I’d like for you to know that your lectures have been of great help to me.

Mrkk says

Can you tell me about the June exam session wether it is going to be conducted in Bangladesh or not?

lekhram says

thank you

mayzin1707 says

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

mayzin1707 says

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

mayzin1707 says

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

John Moffat says

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.

mayzin1707 says

Thank you so much sir.

John Moffat says

You are welcome 🙂

dante1825 says

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

czwane says

is it safe to assume that the MC increases as you carry on producing one more unit because if the Law of diminishing returns?

alie2018 says

Thanks John.

John Moffat says

You are welcome 🙂