Price Elasticity of demand is an indicator (number) which tells us how demand for a goods in terms of quantity will vary depending on change in price of the product. Usually, when a price of a product is reduced overall demand for the product in the market goes up. This is a case of elasticity of demand.
Elasticity of demand can be either elastic, inelastic or neither. When a large change in price barely changes in quantity of demand, the demand is called INELASTIC. When a moderate change in price, significantly affects demand, the demand is called elastic. Thus, demand can be either Highly elastic or highly elastic depending on sensitivity as mentioned above.
When two factors i.e. price and demand don’t seem to be correlated, we cannot determine elasticity.
Determining elasticity is an important aspect in market research of a product or conducting economic analysis of a market. Elasticity of demand tells us how a demand for a product will fluctuate with change in prices of the product sold by the sellers. This will help the seller to understand overall impact of price changes on the top line and bottom line of the company. For example, Price reduction can increase volume of goods under demand. However, it can reduce total turnover and profit of the company. Alternately, price reduction can increase both volume and revenue of goods sold and yet keep its profit unchanged or lowered.
Such detailed analysis can be conducted if one knows about the price elasticity which helps the firm to strategic pricing decisions accordingly.
Old price per box = $81 per box
Number of boxes sold at old price = 35,000 boxes
Therefore,
Total revenue earned last year = $81 x 35000 = $ 2835,000
New price per box = $73 per box
Number of boxes sold at new price = 37,000
Therefore,
Total revenue earned this year = $ 73 x 37000 = $2701,000
Since,
Total revenue earned this year < Total revenue earned last year,
REVENUE WILL DECREASE
Decrease in revenue = $ 2835,000 – $2701,000 = $134,000
| REVENUE WILL DECREASE AS A RESULT OF PRICE CUT BY $134,000 |
Total cost last year
= Fixed cost + Total variable cost
= Fixed cost + Variable cost / box x number of boxes sold
= $25,000 + $48 x 35,000
= $25,000 + $1680,000
= $1705,000
Total cost this year
= Fixed cost + Total variable cost
= Fixed cost + Variable cost / box x number of boxes sold
= $25,000 + $48 x 37,000
= $25,000 + $ 1776,000
= $1801,000
Therefore,
Profit last year = Last year revenue – Last year cost = $2835,000 – $1705,000 = $1130,000
Profit this year = This year’s revenue – This year’s cost = $2701,000 – $1801,000 = $900,000
Thus ,
Profit this year < Profit of last year
Profit will go down by = Profit last year – Profit this year = $1130,000 – $900,000 = $230,000
| PROFIT WILL GO DOWN BY = $ 230,000 |
