Assignment-1 Economics and Management Decisions

Case Study 1

The vending machines sell soft drinks at $3.50 per bottle. Now at this price, consumers buy
4,000 bottles per week. To increase sales, it has been decided to decrease the price to $2.50,
increasing sales to5,000 bottles. Now, calculate the price elasticity of demand.

 Price elasticity of demand is the measurement of the change in demand for goods in relation to
a change in their price.
 Price elasticity of demand is calculated as: % change in quantity demanded / % change in price.

% change in quantity demanded = ((new quantity - old quantity)/old quantity) x 100

= ((5,000 - 4,000)/4,000) x 100

= 25 %

% Change in price = ((new price - old price)/old price) x 100

= (($2.50 - $ 3.50)/$3.50) x 100

= - 28.57%

Price elasticity of demand = 25% / -28.57%

= -0.875

So, the demand for soft drinks is relatively inelastic. This means that a reduction in the price of soft
drinks has a much smaller impact on the quantity of the product demanded than indicated above.

Conclusion: Vending machine operators should think about other ways to increase sales, because
lowering the price is not an effective approach.