Question

Price Elasticity of Demand: AWAKE

Price Elasticity of Demand measurers how changed in a price affect the quantity of the product demanded. Specifically, it is the ratio of the percentage change in quantity demanded to the percentage change in price. In order to understand how to plan a successful pricing program, marketers must understand how elastic or inelastic the consumers are to changes in price. In other words, to what extent will a price increase or decrease result in changes in demand? For some products a price increase may in fact result in a drop in revenue if the quantity demanded declines. However, for that same product a price decrease may actually result in a revenue increase if the quantity demanded rises significantly.

                                                % Change in Quantity Demanded

Price elasticity of Demand = ---------------------------------------------------------------------

% Change in Price

To calculate Percentage Change in Quantity Demanded:

Quantity Demanded at T2 − Quantity Demanded at T1

% Change in Quantity Demanded = -------------------------------------------------------------------------------------- × 100

                                                                                 Quantity Demanded at T1

To calculate Percentage Change in Price:

                                Price at T2 − Price at T1

% Change in Price = ------------------------------------------------------------------------------ × 100

                                                           Price at T1

Remember that markets are elastic if the Price Elasticity of Demand is less than -1. Thus, an elasticity of -5 would indicate that a 1% decrease in price produces a 5% increase in quantity sold. But it is important to remember that markets are not always elastic some marketing are inelastic.

In an inelastic demand market, price elasticity of demand is greater than -1. That means that if price elasticity of demand is -.50 then a 1% increase in price results in a ½ percent decrease in the quantity demanded. Inelastic demand markets allow marketers to raise price with fewer customers leaving the market than in elastic demand markets. However, a price decrease will not entice large groups of buyers into the market as they might in an elastic demand market.

In the following exercise, you’ll evaluate the Price Elasticity of Demand.

Read the fictional scenario below, you need to identify the price before the price/increase and quantity demanded before and after the price increase/decrease.

Case:

Brian Andrews ten years ago founded “AWAKE” energy drink. At a recent trade show, Brian had a number of consumers of AWAKE come and tell him how great the product is and how “they could not get through the day without it”. Brain’s marketing manager after listening to the consumers told Brian it was time to increase the price. Brain had always been reluctant since there were so many options for energy drinks that he thought people would just switch to another brand. His marketing manager explained that consumers who are loyal to a brand become less price sensitive, thus more inelastic. Price increases are more readily accepted than for consumers who are not brand loyal.

Brian was still nervous about the price increase but authorized an increase in price for his newest energy drink line Naturally AWAKE which contained fewer ingredients and higher levels of vitamin supplements. If this increase went well then the firm would roll out an across the board increase.

The following chart contains the price and sales data for Naturally AWAKE.

Time Period	Price/unit	Quantity Demanded
T1 (original Price)	$4.00	150000
T2 (new Price)	$4.99	140000

1. What is the percentage change in price”?

  (Click to select)   25%   20%   15%   30%   35%

2. What is the percentage change in quantity demanded?

  (Click to select)   -5.6%   -6.6%   5.6%   6.6%   7.6%

3. What is the Price Elasticity of Demand?

  (Click to select)   .28   -.28   .20   -.20   -.30

4. Is the market for Naturally AWAKE elastic or inelastic?

  (Click to select)   Inelastic   Elastic   Neither elastic nor inelastic   Cannot determine from the data provided

5. Would this price increase result in a revenue increase or decrease for the firm?

  (Click to select)   Decrease   Increase   Remain the same   Cannot determine from the data provided

6. Would all AWAKE products have the same price elasticity of demand?

  (Click to select)   Yes, all products would be the same.   No, different product categories have different elasticities.   Cannot determine from the data provided

Answer 1

1) Percentage change in price is given by

(T2- T1/T1)*100 = ($4.99-4/4)*100= 24.75% or 25% .

So answer is option A)25%

2 ) Percentage change in quantity demanded

= (Quantity demanded at T2- quantity demanded at T1/ Quantity demanded atT1)/*100

= (140000-150000/150000)*100 = -10000/150000*100

= (-)6.67%

So answer is option B) (-)6.6%

3) Price elasticity of demand is given by

(%Change in quantity demanded/% change in price )

= (-6.6/25 )=0.269~( -)0.28

So answer is option B) (-)0.28

4)The elasticity is more than (-)1 ie (-)0.28 So the demand is inelastic ie option A

5 ) We can determine the revenue change from the product of quantity demanded and price at T1 and T2

Revenue when price is T1= $4* 150000=$ 600000

Revenue when price is T2=$4.99* 140000=$ 698600

Yes the revenue has increased. Option B is the answer.

6) Different product categories have different elasticities depending on the availability of substitutes or the loyalty of the customers for that particular variety etc.

So answer is option B) Different elasticities for different varieties.

(You can comment for doubts)