ECONOMICS & MANAGEMENT DECISIONS

Assignment 1 | Calculating the Impact of Price Change on Soft Drink Sales

1. Introduction

a) Overview of Price Elasticity of Demand Price: Elasticity of demand is a concept that

measures the responsiveness of consumer demand to changes in the price of a product. It is
a critical tool in understanding consumer behaviour as it helps determine how sensitive
consumers are to price fluctuations and it helps businesses to make informed decisions
regarding pricing strategies. Price elasticity of demand is significant because it allows us to
assess how consumers will react to price changes and whether those changes will impact
sales positively or negatively.

b) Relationship between Price Changes and Consumer Demand: The relationship between
price changes and consumer demand is a central theme in economics. Elasticity measures
this relationship by quantifying the percentage change in the quantity demanded in response
to a percentage change in price. If demand is elastic, a change in price will significantly
impact the quantity demanded, while inelastic demand suggests a small change in quantity
demanded due to price changes.

2. Scenario Analysis

a) In the given scenario, a soft drink vending machine sells 4,000 bottles per week at a price
of $3.50 per bottle.

b) The decision was made to decrease the price to $2.50, which resulted in an increase in
sales to 5,000 bottles per week.

3. Calculation of Price Elasticity of Demand

a) The formula to calculate price elasticity of demand (PED) is as follows:

PED = %change in quantity demanded

%change in price
b) Calculate the percentage change in quantity demanded using the initial and final
quantities:

% Change in
(5000 – 4000) X 100% = 25%
quantity demand =

4000

c) Calculate the percentage change in price using the initial and final prices:

% Change in Price = (2.50 – 3.50) X 100% = -28.57%

3.50

d) Apply the values to the PED formula and calculate the price elasticity of demand:

PED = 25% ≈ -0.87

-28.57%

4. Interpretation of Price Elasticity of Demand

a) The interpretation of price elasticity of demand values is as follows:

- If PED > 1, demand is elastic.

- If PED < 1, demand is inelastic.

- If PED = 1, demand is unitary elastic.

b) Analyzing the calculated PED value of approximately -0.87, we find that demand is
inelastic, as it is less than 1.

c) In terms of the responsiveness of demand to price changes, this means that a 1%

decrease in price leads to less than a 1% increase in quantity demanded, indicating that
consumers are not very responsive to price changes.
5. Implications and Discussion

a) The implications of the price elasticity of demand calculation for the soft drink vending
machine are that lowering the price to $2.50 increased sales but did not lead to a
proportionate increase in demand. This strategy may have attracted more customers but did
not significantly boost revenue.

b) The potential impact of the price decrease on revenue and profitability depends on the
cost structure of the vending machine's operation. If the cost of goods sold per bottle is more
than the price decrease, it might negatively affect profitability despite higher sales.

c) Adjusting prices to influence consumer demand has potential benefits, such as increasing
market share or attracting price-sensitive customers. However, it may also lead to reduced
profit margins and the need to manage costs more effectively.

6. Conclusion

a) In summary, price elasticity of demand is a crucial concept in economics and business. It

helps us understand how consumers respond to price changes and assess the impact of
pricing decisions on sales and revenue.

b) The importance of understanding price elasticity of demand in making pricing decisions

cannot be overstated, as it allows businesses to optimize their pricing strategies and make
informed choices that align with their goals.

c) Elasticity is a key tool for evaluating the impact of price changes on consumer behaviour
and sales, providing businesses with valuable insights into market dynamics and the
responsiveness of their target audience.

-Parth Vishnukumar Limbachiya

STUDENT ID: Jul-23.MBA-OG10