ABSTRACT

Analysis of Elasticity of demand based on price

variable. Price implication and its associated
discussion.

Rajendran, Gobikumar
MBA first semester SAP NO:500127080

ASSIGNMENT‐1
CALCULATING THE IMPACT
OF PRICE CHANGE ON SOFT
DRINK SALES
INTRODUCTION
Elasticity of demand is the responsiveness of the quantity demanded of a good or service to a change in
any one variable influencing demand, Variables such as Price, Income, cross and promotional
elasticities of demand. Pricing decision and policy decisions are dependent on theses demand elasticity.

DETERMINERS OF PRICE ELASTICITY

Demand for a goods may elastic or inelastic. Magnitude of price elasticity as follows.
1. Closeness of substitutes are Increase in the price resulted in customers buying close equivalents. As
a result, a particular brand of a product has a higher price elasticity of demand than the product as
a whole.
2. Nature of the good: Luxury goods are price elastic and necessity goods are price inelastic. Demand
for high end phone has high elasticity and Rice has low elasticity.
3. The ratio of income spent: The elasticity of demand increases with income spent on a good.
Common items like buttons, matches, and salt have relatively little elasticity in demand since the
average customer spends very little of his income on them. On the other hand, since they account
for a sizable number of consumers' budgets, the demand for commodities like Phones and clothes is
typically elastic.

ANALYSIS OF PRICE ELASTICITY DEMAND (Ep)

With all other variables held constant, the price elasticity of demand is defined as the ratio of the
percentage change in quantity demanded to the percentage change in price.

Scenario Analysis  Present the given scenario where the soft drink vending machine sells 4,000
bottles per week at a price of $3.50 per bottle.
 Explain the decision to decrease the price to $2.50, resulting in an increase in
sales to 5,000 bottles per week.
Ep= Percentage change in quantity demanded / Percentage change in price
% ΔQ= (1000/4000)=25%
% ΔP= (‐1/3.5)=‐28%
Ep = ΔQ/ΔP.P/Q
ΔQ= 1000 Nos
 ΔP= $1
P= $3.50
Q= 4000 Nos
Ep= 0.89

INTERPRETATION OF ELASTICITY OF DEMAND

The firm needs to analyze variable that impact demand and calculate numerical estimations of these
factors to plan for its growth and make the best operating decisions.

Price Elasticity and Total Revenue

Price elasticity
coefficient Interpretation Total Revenue (TR)

Price increase Price decrease

Just one price is feasible. Infinite, Size of

Ep= ∞
Offered indefinitely at that TR falls to zero market
(Perfectly elastic demand)
cost. determines TR
Ep>1 Percentage %ΔQ > %ΔP TR decreased TR Increased
E= 1 TR unaffected by price TR unaffected by price
%ΔQ = %ΔP
(Unitary Elastic demand) change change
E<1
%ΔQ < %ΔP TR increases TR decreases
(Inelastic demand)
Perfectly Inelastic demand
%ΔQ remains same to %ΔP TR increases TR decreases
E=0

From the observation (PED) demand is less elastic (E<1) a change in price results in a lesser shift in
demand as depicted Graph as below.
IMPLICATION AND DISCUSSION

The firm needs to analyze factors that impact demand and calculate numerical estimations of these
factors to plan for its growth and make the best operating decisions.
These elasticity estimations are necessary for the firm to decide on operational policies and the best
course of action for responding to rival firms' policies. Analysis the demand of product, knowing how
much a change in the unit pricing will impact the product's demand is also crucial. Determine the degree
to which the product's demand has increased, whether prices have been cut, and whether these factors
will lead to a significant increase in sales and profit.
As the price increases, the overall revenue would decline; nonetheless, when there is inelastic demand,
the price hike will result in an increase in overall revenue. Should the company determine that the cross‐
elasticity of demand for their goods in comparison to rivals' prices goods is really elevated. It will react
to the rival quite rapidly to their price cut, or else the business will lose a lot of its sales. But the
company would reconsider cutting its pricing. to avoid igniting a pricing war. It's critical that managers
recognize the degree to which their goods and services are priced flexibly to properly establish prices in
order to optimize business earnings.

CONCLUSION
Elasticity of demand has been calculated based on the variables like price change. Following observation
derived.
Price Elasticity and Total Revenue
Price elasticity
coefficient Interpretation Total Revenue (TR)

Price increase Price decrease

E<1
%ΔQ < %ΔP TR increases TR decreases
(Inelastic demand)

Demand elasticity of less than one Ep<1 It indicates that there is inelastic demand, meaning that ROI
rises in response to an increase in demand. This is predicated on the observation that there is no
appreciable growth in demand due to inelastic demand. In order to prevent starting a price war with its
competitors, the corporation would think twice before lowering its prices.