Unit 1 Price Elasticity Total Revenue Graphical Exercise
Imagine you operate a small canteen at a school. You suggest increasing the brand
of a can of Brand X soft drink from $1.00 per can to $1.40 per can.
The manager believes this is not a good idea. Since a close substitute is selling for
$1.00.
He makes the observation that ‘at the moment. We are selling 200 cans per day of
Brand X, at $1.00 per can. Generating total revenue of ____________.
The manager therefore believes that you will only sell 120 cans per day if you
increase the price of Brand X to $1.40 per can.
This will result in a daily revenue of ____________________________
The manger states that the revenue we gain from increasing the price per can
(revenue gained = ________________________) will not be enough to offset the
revenue lost from the decrease in the quantity sold (revenue lost =
____________________________)
The managers reasoning rests on the assumption that Brand X has a close
substitute in Brand Y and that Brand X is price elastic.
1. Define the term price elastic
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2. Draw a demand curve which demonstrates the managers reasoning.
You however are more in touch with teenage trends and fashion and disagree with
the managers assumptions.
You are aware that brand X is really popular at the moment and believe that an
increase in price to $1.40 will not lose that many sales.
To make your point you draw up your own analysis
3. Show a demand curve that shows an increase in price from $1.00-$1.40 and a
loss of only 10 cans per day from the original quantity.
4. Calculate the revenue gain from the increase in price.
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5. Calculate the revenue lost from the increase in price.
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6. Based on your calculations will an increase in price generate more net revenue?
Discuss whether Brand X is price elastic or inelastic.
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