Summer Special

Henry Caulfield is no stranger to the economic concept of price elasticity. He has a bachelors degree in business administration and was doing well as the regional manager of a large supermarket chain when he decided to leave his job and open his own business. Indeed, it was his understanding of price elasticity that prompted him to reduce the soft drink prices as a way of competing against the two new stores in his area. When he had offered special discounts on soft drinks in the past, he noticed that people were very responsive. In fact. Henry had kept a record of the relationship between price and sales, a part of which is shown in Table. The special price was offered as part of the stores Fourth of July Celebration sale. The data indicate an elastic demand for soft drinks at Henrys store. When demand is price elastic, a reduction in price causes total revenue to increase. This was exactly what had happened when Henry had offered his Fourth of July celebration special. He was now puzzled because the permanent price reduction did not seem to be having the same positive effect on his total revenue. Then, in a flash, it dawned on him. One of the most important aspects of demand elasticityand, for that matter, of any aspect of economic analysisis the assumption that certain factors are held constant in the examination of the impact of one variable on another. In this case, it was assumed that other factors besides price did not have an impact (or at least not much of an impact) on quantity when Henry had offered the special holiday price for his soft drink. What other factors besides price might now be taken into account? Sales Data for 2-Liter Bottles of Soft Drinks AVERAGE PRICE Regular Price $1.89 Special Price $.89 AVERAGE WEEKLY SALES 1,050 2,450 TOTAL REVENUE $1,985 2,181

How Much Tuition for College Students?

The board of trustees of a leading state university is faced with a critical financial problem. At

present tuition rates, the university is losing $7.5 million per year. The president of the university, a well-known biologist, urges that tuition be raised $750 over the present $3,000 ratea 25 percent increase. Based on the 10,000 students now attending school, he projects that this increase would cover the $7.5 million shortfall in revenue. Student leaders protest that they cannot afford a tuition hike, but the president responds that the only alternative is to cut back significantly on programs and faculty. The faculty supports the tuition increase as a means of preserving their jobs. The students quickly realize that any appeal that involves compassion for their plight is likely to fall on deaf ears. Their only hope is to demonstrate that the tuition hike is not in the best interest of the university. What can they do?

A MINI CASE VCD RENTALS

According to a Chamber of Commerce study in Mumbais VCD rental market the price elasticity of demand for VCD rentals is 0.7. A 10% rise in rentals implies a decline in the demand for VCDs on rentals by 7%. That means the demand for VCDS on rentals is inelastic. Based on this information, the owner of Andheri Music Stores, a B Com. graduate increased the rentals by 25% in order to enhance its total revenue. Contrary, to his expectations, the stores total revenue decreased, in consequence. What is the mystery?

A POOR PRICING STRATEGY

The inclination towards setting up grocery stores and soft drink outlets in petrol pumps is catching up in a big way in all the cities in India. One such petrol pump with a soft drink outlet was located at a place where there were no other grocery stores with soft drink outlets within a radius of 5 km. During the summer of 2002, the owner of the outlet offered a discount of 10% and sales soared from 700 bottles per month to 1500 bottles per month. The discount was withdrawn subsequently. Encouraged by the response, six months later, the owner decided to bring about a permanent reduction of 10 percent in the price of soft drink. In the meantime, two new grocery stores with soft drink outlets were set up in the vicinity. This time to the owners dismay, the sales went up marginally from 700 bottles per month to 800 bottles per month and since a reduction in the price had already been announced the owner could not revert to the old price soon. What is the reason for the failure of the pricing strategy?