CIMA P2 Syllabus B. Capital Investment Decision Making - The Optimum Selling Price and Quantity - Notes 2 / 3
Demand-based approaches (the economists’ viewpoint)
Normally when price increases, the quantity demanded falls
The Price-Demand equation:
P = a - bQ
Where
P is the selling price
Q is the quantity demanded at that price
a = theoretical maximum price (if price is set at ‘a’ or above, demand will be zero), i.e. from the graph above, at a price of $200, demand is zero.
b = the gradient of the line, calculated by = ∆P / ∆Q
Profit Maximisation
This will happen when...
Marginal Revenue = Marginal Cost (Variable cost).
Marginal revenue (MR) can be calculated by this equation:
MR = a – 2bQ
Illustration
Variable cost = $24 per unit.
At a selling price of $60, demand is 1,000 units per week.
For every $10 increase in selling price, demand reduces by 50 units
Calculate the Optimal Selling Price
