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Optimal pricing – tabular approach – ACCA Performance Management (PM)

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  2. I would like to share my understanding of PED formula, maybe useful for someone.(Price and demand correlation)

    PED= Q2-Q1/Q1//P2-P1/P1

    Q2 and P2 are from the same pair like: 200 units and $15.50 from the table.
    Same Q1 and P1 are also same pair from the table: 100 units and $16

    What’s very important: Q2 is always demand with higher number of units then Q1 and as we know ‘lower price higher demand’ so P2 will be always with smaller price tag then P1.

    $16 (P1) ~ 100 units (Q1)
    $15.50 (P2) ~ 200 units (Q2)

    PED= 200-100/100//15.5-16/16 =1/ -0.03125 x100%= 100% / 3.125% =32

  4. Dear John,
    While resolving the example 2, we found that the optimum selling price is $15 since it is giving higher profit. However, the Marginal Revenue and Marginal Cost are not equal at this point. Reading the notes i found that the point where Marginal Cost and Marginal Revenue will be equal to each other will the point of optimum pricing.

  5. Dear John,
    Also, while resolving the 1st part of example 3, (through equation), it doesn’t giving the result that arrived through tabluar format. I am putting the values as:

    a=16+(0.5/100)*100=16.5
    b=(0.5/100)=0.0005

    P=a-bQ
    P=16.5 – 0.0005(100) = 16.45
    What i am doing wrong in equation since tabular result gives 32 (as per the method you used in the video).

  6. Dear John, while resolving the 2nd part of example 3, where the question requires to resolve where selling price is $15 per unit. However, the answer comes using your method is 7.500. However, in free notes, the answer is given as 10. I tried tons of times but the answer doesn’t arrive 10.

  10. Hi,
    Firstly thank you for the great lecture.
    I have a question about the price elasticity of demand. At the very last bit of the lecture, PED marked as -32. You told that the price is very elastic to the changes in price as a slight drop in price resulted in 100% increase in demand. I understand this and makes sense. But why my study book says PED > 1 indicates elastic demand. Here we have a minus PED so doesn’t that mean inelastic demand?

    Thank you

  11. Hello Sir,

    First of all many thanks for all these lectures!

    One question I had is that in your notes you mention that the optimum selling price is where MR=MC.

    So in our example, would it be fair to say that 15 is not the actual optimum selling price as MR still > than MC so it would be slightly less that 15 and of course higher that 14,5 so around 14,8 let’s say?

    Best,

    Kostas

    • Yes, you are correct. However when the question is tabular as in this example, you have to assume that the only possible selling prices are those given in the question (and therefore 14.8 would not be possible).

      You will see in the next lecture that there can also be questions where any selling price is allowable in which case we use equations and do find the exact price at which MR = MC.

  15. In the notes. it says that optimum selling price occurs at the point where MC=MR. It is a bit confusing because based on the example, MC is not equal to MR at optimum selling price of $15p.u . Can you elaborate on this? thanks

  17. Thanks John. Good presentation and straightforward. This approach shows the relationship between price and demand and the effect on profit. The optimum SP is the price that maximize profit or where MR=MC. If MR is greater than MC then it is worth selling the product and if MC is greater than MR then it is not worth selling it. The PED is well explained and simply to understand.

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