Assignment 2 of Managerial Economics

Name: Surabhi Rajak

Semester: 1

Mail ID: surabhirajak007@gmail.com

Contact No: 9734276410

 Percentage change∈Quantity
1. Price elasticity of demand (Ed ) = Percentage change ∈Price ….……(1)

Here percentage change in price is = -10% (Minus denotes the

decreasing value)

Now

Old New
Quantity 700 1500

1500−700
Then Percentage change in quantity = 700 x100
=114.28%

From the equation (1) we get

114.28 %
Price elasticity for summer 2018 is = −10 %
= -11.43%

Here minus sign denotes the relationship between price and quantity as
when the price decreased by 10% then the demand is increased.

Therefore, the price elasticity of demand is 11.43.

Here price elasticity of demand is 11.43 >1. This implies a small

percentage change in price is leading to a larger change in quantity
demand. That is reason behind the increasing demand of cold drinks
from 700 to 1500.
 2. Below factors that have changed since then and the effect of
them are following:

 Availability of substitute (here substitute of cold drinks that is

sold by the shop):

At the time of opening of the shop there was only one shop for the cold
drinks. After then two more shops opened declaring the permanent
decreased in price. So the price factor is not there and due to
availability of substitute increased, the sale of the first shop was not
increasing like summer time.

 Time (Season change):

When the first shop opened the time was summer time and the
requirement of cold drinks is higher than any season. But after six
months the season changed and the requirement falls from before so
the time factor here changed and the effect is quiet visible on the
selling perspective.

 Nature of the commodity:

Cold drink is not a necessary product. So small change in price will bring
a huge change in demand. And the elasticity is very high here.

 Range of substitute:

After opening of the new two shops have increased the range of
products from before summer time. Customer has more range of cold
drinks from before, so this factor has also been changed. And it is the
reason behind the decrease of the demand after six month.
3. Calculation of new elasticity after six months:

Percentage of price = -10% (Minus sign is for decreasing value)

Old New
Quantity 700 800

800−700
Then Percentage change in quantity = 700 x100

=14.29%

From the equation (1) we get

14.29 %
Price elasticity after 6 months from summer 2018 is = −10 %

=-1.43%

Here minus sign denotes the relationship between price and quantity as
when the price decreased by 10% then the demand is increased.

Therefore, the new price elasticity of demand is 1.43.

Here the new price elasticity of demand is smaller than previous

(1.43<11.43), that indicates the price and demand of commodity in
summer is more elastic than after six months when the sale of cold
drinks increased from 700 to 800 only.
Bibliography:

Help from the notes given by Prof. Prabir Mukhopadhyay.

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