Pricing Part3

ACCA F5 - Performance Management 

Understanding Demand (Customers' need) and effect in price:

In real every customers willing to buy the product may not be ready to pay same price. If buyer 1 has urgent need of product and is planning to pay premium for the product (i.e. $180 per unit). Buyer 2 may not have urgent need but is willing to pay 160 and as the production increases to maximum capacity price reduces to 60. This is shown in column I.

This shows demand is driven by the need for the product and potential to pay for the product. In economics, the term demand has a specific meaning. Demand is a functional relationship revealing the quantity that will be purchased of a particular commodity at various prices, at given time and place. The demand for particular time shows the sales figure for that period at average price.

Now go to column G. We see that demand of product represents average revenue.

I.e. Demand at given cost D at  AR Average revenue is shown by Q quantity.

Here, we see that the decrease in price of product increases sale. This change is known as price elasticity of demand. Price elasticity is the proportionate change in quantity demanded divided by the proportionate change in price.

Mathematically, price elasticity E_P =  (∆Q/Q) / ( ∆P /P) = (∆Q/∆P)*(P/Q)

Output	(Demand at) Sales price per unit	Total revenue TR	Marginal revenue = ∆TR/∆Q	Profit	∆Q	∆P in average price	EP= (∆Q/∆P)*(P/Q)
A	G	H	I	J	K	L	(K/L)*(G/A)
	Average Revenue (P)	A*G	∆H	H-D			G and A are taken from base figure
1	180	180	180	(20)	-	-
2	170	340	160	40	1	-10	(1/-10)*(180/1) =-18
5	140	700	100	100	1	-10	(1/-10)*(150/4) =-3.73
9	100	900	20	(100)	1	-10	(1/-10)*(110/8) =-1.4
10	90	900	0	(200)	1	-10	(1/-10)*(100/9) = -1.1
11	80	880	(20)	(320)	1	-10	(1/-10)*(90/10) =-0.9