Optimal pricing - part 3

In this lesson

1. 0:00 Profit maximisation: three-step framework
2. 1:32 Worked example: demand curve scenario
3. 2:25 Step one: deriving the demand equation
4. 3:23 Step two: finding profit-maximising output
5. 6:52 Step three: calculating optimal price
6. 8:05 Computing monthly profit at optimal price

About this lesson

This three-step approach—deriving the demand equation, finding the profit-maximising output level where marginal cost equals marginal revenue, and calculating the corresponding price—is essential for Performance Management and Strategic Business Leader papers. You'll work through a practical example to determine both the optimal selling price and the resulting monthly profit, giving you a complete framework for pricing decisions in real business scenarios. The lesson walks you through each step methodically. First, you'll derive the demand curve equation using the relationship between price changes and demand shifts, finding the constants that define how price and quantity interact. Next, you'll use the fundamental profit-maximising principle—setting marginal cost equal to marginal revenue—to identify the exact output level where the business reaches peak profitability. Finally, you'll substitute that output back into the demand equation to find the price customers will pay at that optimal volume. By the end, you'll see how all the pieces fit together in a worked example. You'll calculate the contribution margin per unit, multiply by the profit-maximising quantity, and subtract fixed costs to arrive at total monthly profit. This practical approach transforms abstract economic theory into a concrete decision-making tool you can apply to real pricing problems in your exams and professional work.

Duration: 9m