In: Accounting
Deman- Related Pricing Calculation
a. Calculate the price elasticity of demand for a restaurant’s pizza under the
following conditions:
Old price: $8
Old quantity:
1,000/month
Total Revenue: $8,000
New price: $10
New quantity: 900/month
Total revenue: $9,000
b. If the new quantity sold per month were 700 (instead of 900), what would be
the price elasticity of demand?
A). Pric elasticity of demand
percentage change in quantity demanded÷ percentage change in price
percentage change in quantity demenaded=((previous quantity
- new quantity)÷ previous quantity))*100 .
Percentage change in price= ((previous price-new price)÷
previous price))*100
Percentage change in quantity= ((1000-900)/1000))*100=10%
Percentage change in price=((8-10)/8))*100= 25%
Note. Please ignore minus sign.You can put minus sign before formula to eliminate the minus sign in final answer or can ignore minus sign
Price elasticity of demand= 10÷25=0.4
Price elasticity demand is less than 1 means product is fall under less than unitary price elasticity of demand. It shows demand of product is inelastic nature. Demand of product is not very much responsive to price of product.becaus 0.40<1.
B).if qauntity sold 700 instead of 900
Newpercentage change in price=
((700-1000)÷1000))*100=30%
Percentage change in price is calculated as above 25%
Price elasticity of demand= 30/25= 1.2
1.2 is greater than 1 which is unitary price elasticity of demand.it shows there will be more change in quantity demand due to less change in price. Or we can say 1 $ change in price will lead 1.2 units change in demand.quantity demand is more responsive to price change.