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PRICE ELASTICITY
Our product is a brand loyal product so if we increase our price by 20% then demand
of our product will decrease by 5% that means elasticity of price is <1. So, our
product is less elastic. (If we increase the price by Rs. 1 then demand will fall by 5
pc per 100 pc)
7
6
EP = ∆Qd . P
∆Px Q P 5
R 4
I
= 5 . 5 C 3
E
1 100 2
1
= 0.25 0 90 95 100 105 110 115 120
Demand
[Our Product’s price elasticity is <1 because our product is in monopolistic market]
Arc price elasticity:
EP = Q2-Q1 . P2+P1
P2-P1 Q2+Q1
= 95-100 . 6 + 5
6-5 95+100
= -0.28
(Source: From consumer’s survey)
INCOME ELASTICITY
If the income rises by 20% then the demand will rise by 10% the curve is positively
sloped means that elasticity of Income is >0 and <1.
(When the average income was Rs. 10,000 and demand was 100)
14
EI = ∆Qd . I
13
∆ Ix Q
I 12
N
= 10 . 10000 C 11
O
2000 100 M
10
E 9
= 0.50 8
0 90 95 100 105 110 115 120
Demand
EXY = ∆QX . PY 7
∆ PY QX 6
5
P
= 8 . 5 R 4
I
1 100 C 3
E
2
= 0.4 1
In the Short run period of time, the demand for the dairy milk is less
elastic because if the price of the dairy milk chocolate suddenly increases Rs.5 to
Rs.7, than the demand of the product will also decrease but in the long run the
demand may not be much affected.
There are some criteria that also affects and they are like:
• Our product should be in the monopolistic competitive market product.
• No change in the taste and quality.
In the Long run period of time, the demand for the dairy milk is more elastic
because if the price of the dairy milk in the 2005 was Rs.5 and in the 2010 it will be
Rs.10 and, the quantity and the quality will remain the same and the other products
also like Kit-Kat and Munch, if they don’t change any of the things like price,
quality and quantity than it will greatly affect the demand of the dairy milk and it
will started decreasing day by day.
Assumptions:
• There are possibilities of change in technology & chances of Product
innovation in the long run.
• There are possibilities of increasing good quality chocolate manufacturing
units.
Snob Effect:
This is a kind of totally contra effect of the band wagon effect. If a person bought
one particular product then the other person wants superior product than the person
had already bought. But in our product the demand does not affect by the snob
effect.