Estimating demand

In this lesson

1. 0:00 Estimating demand using price equations
2. 1:06 Understanding the demand gradient and formula components
3. 2:06 Deriving demand equations from data points
4. 4:08 Calculating the gradient step by step
5. 6:13 Profit maximisation with marginal revenue and cost
6. 8:21 Marginal revenue formula and application
7. 9:26 Worked example: finding profit maximising price

About this lesson

This is essential for the Performance Management and Advanced Performance Management papers, where demand analysis directly supports pricing and profitability decisions. The lesson starts by introducing the demand equation formula, which is provided in your exam. You'll learn that P represents price, Q is quantity demanded, a is the theoretical maximum price (the intercept), and b is the gradient showing the price change needed to shift demand by one unit. The key skill here is calculating b using absolute changes in price and quantity—not percentage changes, which would be price elasticity instead. You'll see how to plot this on a graph and interpret the downward-sloping demand curve. Next, you'll work through deriving a demand equation from two data points. Using a worked example with Joe Co's coffee sales, you'll see the step-by-step process: first calculate b using the change in price divided by change in quantity, then substitute this into the demand equation along with known price and quantity values to find a. This two-step approach is consistent and reliable for any scenario you'll encounter. Finally, you'll connect demand to profit maximisation using marginal analysis. The lesson explains that profit is maximised where marginal revenue equals marginal cost, then shows you the marginal revenue formula (MR = a – 2bQ). A detailed multiple-choice example walks you through calculating the profit-maximising quantity and price for a real product, bringing together all the concepts and showing exactly how to apply these techniques under exam conditions.

Duration: 14m