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)

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.

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).

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.

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 so much John, I watched the video again and made my revision. I love your lectures, very helpful and easy to follow.

kkipourossays

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?

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.

Nedi: I do explain this in the next lecture on pricing. It is because the only selling prices ‘allowed’ in this example are those stated in the question.

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

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.

You will have to say which bit of the answer in the notes that you are not clear about, because the approach at $15 is exactly the same as the approach I work through in the lecture at $16.

Paulina says

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

baraka42 says

3

SP Demand

15 300

14.5 400

0.50 100

0.50/15 =0.033

Hello Sir, What am I doing wrong here, I have followed the same process you used but I am ending up with different answer

100/0.033 =

John Moffat says

You have not followed the same process as me. You should be dividing the two % changes. See the printed answer in the free lecture notes 🙂

kamran.khan says

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.

John Moffat says

I explain this in the lecture on optimal pricing!

It is because the only selling prices available in this example are those given in the question.

shakir7385 says

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).

John Moffat says

I have no idea what you are trying to do, or why.

The PED is the % change in the demand divided by the % change in the selling price. What you seem to be doing is certainly not doing that!

shakir7385 says

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.

John Moffat says

I have absolutely no idea how you are arriving at 7.500. The answer is 10 and the workings are shown in the answer.

Asif110 says

When discussing elasticity we ignore the negative sign. Is there a reason for that ? What would a negative 32 indicate compared to a positive 32 ?

John Moffat says

We don’t bother with the sign because we know it will always be negative. A higher selling price is not going to result in higher demand is it? 🙂

adekjarin says

Thank you so much, Sir. I really enjoyed your lecture. May God bless you with a good health!

John Moffat says

Thank you for your comment 🙂

pateladam says

What is the answer for the PED for $15?

John Moffat says

10.

The answer is in the free lecture notes (along with the answers to all of the examples)!! You can find the answers by checking the contents page.

tugcem says

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

John Moffat says

When discussing elasticity we ignore the minus sign 🙂

tugcem says

Thank you so much John, I watched the video again and made my revision. I love your lectures, very helpful and easy to follow.

kkipouros says

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

John Moffat says

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.

kkipouros says

Understood and thank you very much for your reply sir!

Best regards,

Kostas

John Moffat says

Nedi: you are welcome 🙂

nedi says

Ok I get it now. Thank u so much!

John Moffat says

Nedi: I do explain this in the next lecture on pricing. It is because the only selling prices ‘allowed’ in this example are those stated in the question.

nedi says

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

ruhinaahmadzai says

sir, your lectures are just amazing….

John Moffat says

Thank you for your comment 🙂

alie2018 says

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.

John Moffat says

Thank you for your comment 🙂

jenny91 says

please do example 3 – second question- I don’t understand the answer in the notes based on selling price $15

thank you.

John Moffat says

You will have to say which bit of the answer in the notes that you are not clear about, because the approach at $15 is exactly the same as the approach I work through in the lecture at $16.