Finance and the Economy · Seminar 6 · Pricing decisions and profit maximisation

From market research to the profit-maximising price

Seven price–quantity observations give a linear demand curve, P = 20 − 0.002Q. Marginal revenue has twice the slope, MR = 20 − 0.004Q. Profit is maximised where MR meets marginal cost. Compare that with the cost-plus price of £14, and see what a rising MC curve does. Question 4 (Hawksmetics).

Pick a part of the question, or move the cost sliders. Dots are the market research observations; the solid purple line is the fitted demand curve.
lowhigh
constantsteep
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Fitted demand curve

Output

Price

Weekly profit

The learning point. Cost-plus pricing cannot see demand. With market research and marginal analysis the firm finds that a lower price sells more, spreads fixed cost thinner and earns more. Excel’s R² of 0.94 says the straight line explains 94% of the variation in price, so the demand estimate is a sound basis for the decision.

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