- 10 Marks
Question
You are the Account Officer of Dinke Café, a company that sells cocoa drink to a wide range of consumers. The company sells a cup of cocoa drink for GH¢2, which yielded a sales output of 10 million cups for the year ending 2021. As part of a promotional package to celebrate its silver jubilee, the company reduced its price to GH¢1.50, which increased its total sales output to 15 million cups for the year ending 2022.
Required:
i) Calculate the price elasticity of demand of Dinke Café.
(4 marks)
ii) Explain THREE (3) factors that might have determined the company’s price elasticity of demand.
(6 marks)
Answer
i) Price Elasticity of Demand Calculation:
Price elasticity of demand = % change in quantity demanded / % change in price
ii) Factors Determining the Company’s Price Elasticity of Demand:
- Availability of Substitutes:
The existence of close substitutes to the cocoa drink could influence the price elasticity of demand. If competitors sell similar products, consumers may easily switch if prices rise, making demand more elastic.
(2 marks) - Degree of Necessity:
If consumers view the cocoa drink as a necessity, they may continue purchasing it despite price changes, leading to inelastic demand. Conversely, if it’s considered a luxury, demand may be more elastic.
(2 marks) - Consumers’ Income:
The disposable income of consumers can affect price elasticity. If consumers have higher income, they may be less sensitive to price changes, leading to inelastic demand. Conversely, lower income levels could make demand more elastic.
(2 marks)
- Tags: Demand Determinants, Market Analysis, Price Elasticity, Pricing Strategy
- Level: Level 1
- Topic: Competitive forces and markets
- Series: MAR 2023
- Uploader: Theophilus