Question

2.         At its current price $32 per case, the quantity demanded for Parcels Pickles is 10,000 cases and its demand elasticity is estimated to be 2.7.  Parcels’ costs have been increasing and Parcels is considering a 10% price increase.  What would be the estimated impact on Parcels’ sales.  Can you advise Parcels as to whether or not the price increase is adviseable?

Answer 1

The Price Elasticity of demand is 2.7. Since Price Elasticity of Demand is greater than 1, it means demand is Elastic. When demand is elastic, it means that a given percentage change in price will result in even larger percentage change in Quantity Demanded.

It means that when demand is elastic, a given percentage increase in price, will result in larger percentage decrease in Quantity Demanded and thus total revenue decreases. The vice versa also holds true. This means with a given percentage decrease in price will result in even a larger percentage increase in Quantity Demanded and thus total revenue increases.

In this case as the price is elastic, with the increase in 10% price of Parcels, the percentage decrease in the Quantity Demanded of Parcels will be even larger and thus as a result the total sales revenue will decrease.

Price Elasticity of Demand

= % Change in Quantity Demanded / % Change in Price

Plugging Values in above formula, we get

2.7 = % Change in Quantity Demanded / 10

% Change in Quantity Demanded = 2.7 * 10 = 27%

So, it means with 10% increase in price of Parcels, the Quantity Demanded will decrease by 27%

Initial Price = $32

Intital Quantity Demanded = 10,000

Initial Revenue = Price * Quantity

= $32 * 10,000 = $320,000

Increased Price = $32 + 10% of $32 = $32 + $3.2 = $35.2

Decreased Quantity Demanded = 10,000 - 27% of 10000

= 10,000 - 2700 = 7300

Revenue = $35.2 * 7300 = $256,960

Decrease in Revenue = $320,000 - $256,960 = $63, 040

Thus by increasing the Price by 10%, the revenue of firm will decrease by $63,040. So, it is not advisable for Parcels to increase the price.