SALES PLAN

Price Elasticity, Cross Elasticity & Income Elasticity

November 14, 2011 RAJIB BARUA

SALES PLAN
Price Elasticity, Cross Elasticity & Income Elasticity Price elasticity of demand (PED or Ed)
Is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income)

PED is derived from the percentage change in quantity (%Qd) and percentage change in price (%P).

Elasticities of demand are interpreted as follows: Value Descriptive Terms Ed = 0 Perfectly inelastic demand - 1 < Ed< 0 Inelastic or relatively inelastic demand Ed = - 1 Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand - < Ed< - 1 Elastic or relatively elastic demand Ed = - Perfectly elastic demand

PRICE ELASTICITY

PRODUCT
BUTTER CHICKEN MARGARINE FRUITS MUTTON CIGARATTES FABRIC TAILORING - 0.24 - 0.30 - 0.28 - 3.02 - 1.01 - 0.53 - 0.62 - 0.87

From the table the following information is derived as follows: 1) Butter, Chicken, Margarine, cigarettes, fabric & Tailoring are Inelastic or relatively inelastic demand. 2) Fruits & Mutton are relatively elastic.

Cross elasticity of demand:

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products The formula used to calculate the coefficient cross elasticity of demand is: .

Or

Two goods that complement each other show a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls

Two goods that are independent have a zero cross elasticity of demand: as the price of good Y rises, the demand for good X stays constant

Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises

PRODUCT
BUTTER

CROSS PRICE ELASTICITY

MARGARINE 1.53

So as from the given data the following information derived as follows: 1) Increase in the Price of BUTTER will increase in Price of MARGARINE as because aresubstitute and showing a
Positive (+) cross elasticity. 2) In case of CHICKEN & MUTTON also as they are showing Positive Cross elasticity. 3) But in case of FABRIC with TAILORING the relation of Cross Elasticity showing Negative (-). Which means increase in price of FABRIC will decrease in Price of TAILORING.

CHICKEN

MUTTON 0.42

MARGARINE FRUITS MUTTON CIGARATTES FABRIC TAILORING - 1.7 TAILORING

Income elasticity of demand In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2. How to calculate:

A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes.

A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good. The table is showing the Income elasticity of few Products
PRODUCT
BUTTER CHICKEN MARGARINE FRUITS MUTTON CIGARATTES FABRIC TAILORING 0.42

INCOME ELASTICITY

0.05 1.3 1.87 0.87 0.98 0.98

. From the Above table its clear that few Products prices are very sensitive to income and few are less sensitive. 1) Butter has no Elasticity to change in Income 2) Margarine is very less elasticity to change in Income. 3) Chicken, cigarettes, Fabric & Tailoring are less elastic to Income as compared to Fruits & Mutton. So, from the above set of Price, Income & Cross Elasticity of Demand the following set of SALES PLAN formed: 1) We have to promote the items which are less elasticity. Like Butter, Chicken, Margarine, Cigarettes, Fabric & Tailoring. 2) Fruits are highly elastic to Price and Income so its sales quantity cannot be changed. 3) Mutton is also very elastic to Price and Income. 4) Chicken, Margarine, cigarettes, fabric & tailoring are necessity goodan increase in income will lead to a rise in demand. 5) Fruits and Mutton are superior goodthe elasticity of demand is greater than 1. 6) (Butter with Margarine) & (Chicken with Mutton) must be kept together as they are substitute to each other. 7) We have to reduce the price of Tailoring when Fabric price is increasing. 8) So as a whole its clear that Price of Fruits cannot be changed at any cost. 9) Price of Butter can be increased up to a certain level. 10) All products excluding the Fruit and Mutton price can be increased.