Question

You have been analyzing the cereal market for some time now. Your boss is the chief operating officer of Cheeros, a cereal selling in the same market as General Mills, and many other brands. You have made the following notes that you are about to present to him in your next meeting:

--change in quantity demanded for the total cereal industry last month = -3 percent

--change in the average price of cereals for the industry last month = +2 percent

--change in quantity demanded for Cheeros last month = -5 percent

--change in price per unit of Cheeros cereal last month = +2 percent.

What can you conclude about consumer sensitivity to Cheeros in relation to the rest of the cereal market? Why do you think this is the case?

Answer 1

Given, % ∆ Q (Industry) = - 3%

% ∆ P (Industry) = + 2%

Elasticity of demand is defined as percent change in quantity due to the percent change in price.

Elasticity of industry = (-3/2) = - 1.5, Elastic.

%∆ Q(Cheeros) = - 5%

%∆ P(Cheeros) = 2%

Elasticity of cheeros company = - 5/2 = -2.5.

Consumers are more sensitive to the price change in cheeros in comparison to creal industry.

The elasticity of cheeros is greater than the elasticity of creal industry. Therefore, we can conclude that our product is more sensitive to the price. A smaller change in price will change the quantity by a larger proportion.

In other words we can say, the quantity effect is greater than the price effect. Therefore, increase in price of the product will reduce the total revenue of the cheeros more than the industrial average.

The demand curve for the companies product is flatter.

• Large number of close substitute available in the market.
• The consumers prefer other companies product over our product.
• The price of our product must be higher in comparison to other companies product.

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