1.4 Assignment

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Jan 9, 2024

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1.4 Assignment Analyzing Elasticity

To calculate the coefficient of price elasticity of demand using the Midpoints Formula, you can use the following formula: Price Elasticity of Demand (PED) = [(Q2 - Q1) / ((Q2 + Q1) / 2)] / [(P2 - P1) / ((P2 + P1) / 2)] Where:  Q1 = Initial quantity demanded (600 combos per week before the price increase)  Q2 = New quantity demanded (sales declined by 15 combos per week after the price increase)  P1 = Initial price ($5.95)  P2 = New price ($6.95) Let's calculate PED: PED = [(-15) / ((600 + 585) / 2)] / [(6.95 - 5.95) / ((6.95 + 5.95) / 2)] PED = [(-15) / (1192.5)] / [(1.00) / (12.9)] PED ≈ (-0.0126) / 0.0775 PED ≈ -0.1626 (approximately) The fact that the price elasticity of demand (PED) is negative (-0.1626) demonstrates the inelastic nature of combination meals. When demand is inelastic, the percentage change in quantity required is proportionally less than the percentage change in price. In this instance, despite the price rising by roughly 17%, demand reduced by only about 2%. This implies that consumers are comparatively unresponsive to price changes for combination meals, showing that

they perceive these meals as essential or highly desirable and that their demand is not very responsive to price fluctuations. The fact that customers said they would still buy the combo meals even at a higher cost implies that Antonio's has a lot of pricing clout when it comes to its combo meals. The ability of a business to raise prices without significantly reducing demand is referred to as pricing power. Customers clearly place a high value on the combo meals in this scenario, as evidenced by their willingness to spend more, which is a sign of strong brand loyalty and customer happiness. Customers' willingness to pay more than the present $6.95 price shows that there may be room to capture additional consumer surplus in terms of price. Consumer surplus is the discrepancy between what consumers are prepared to pay and what they ultimately end up paying. Customers who are willing to pay more indicate that there is untapped consumer surplus that might help Antonio's realize bigger profits if it decides to raise pricing. It could be worthwhile to think about another price hike to the $7.25 to $7.75 level given the consumers' lack of price response and the favorable feedback on the combination meals. Any price increase should, however, be handled judiciously in order to track how it affects sales and profitability. Although consumers may be somewhat resistant to price fluctuations given the low price elasticity of demand, it's crucial to find a balance between generating profits and upholding customer satisfaction. Future pricing decisions may also benefit from additional market research and a study of competitors' pricing tactics.

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