The Optimum Selling Price and Quantity

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Demand-based approaches (the economists’ viewpoint)

Normally when price increases, the quantity demanded falls

Market Demand diagram

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

Market Demand illustration
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