SQ sells ties and currently has sales of 1,200 units a month, producing a revenue of £36,000. It competes with TR, who is now considering a price cut of 25%. The PED for SQ is –1.5 and the CED between the two products is 0.8.
a) Calculate the effect of TR’s price cut on the sales volume and revenue of SQ
How am I supposed to calculate the Cross Elasticity if I don't have the price of TR?
To calculate the effect of TR's price cut on the sales volume and revenue of SQ, you will need to make an assumption about the price of TR's product. Without that information, it will not be possible to provide an accurate calculation of the effect.
However, I can explain the concept of cross elasticity of demand (CED) to help you understand how it can influence the sales volume and revenue of SQ. Cross elasticity of demand measures the responsiveness of the quantity demanded of one product to a change in the price of another product.
In this case, a positive cross elasticity of demand between SQ's ties and TR's product indicates that they are substitutes, meaning that an increase (or decrease) in the price of TR's product will lead to an increase (or decrease) in the demand for SQ's ties.
Given that the CED between the two products is 0.8, a 1% decrease in the price of TR's product would result in an approximate increase in the demand for SQ's ties by 0.8%. However, without knowing the actual price of TR's product, it is not possible to provide specific calculations on the effect of TR's price cut on SQ's sales volume and revenue.
To calculate the effect of TR's price cut on the sales volume and revenue of SQ, we need a few additional pieces of information. Specifically, we need to know the current price of SQ's ties and the price elasticity of demand for TR's ties.
Once we have these values, we can follow these steps to calculate the effect:
1. Determine the current price of SQ's ties: Let's assume that the current price of SQ's ties is P_SQ.
2. Calculate the percentage change in price: TR is considering a price cut of 25%, which translates to a percentage change in price of -0.25.
3. Calculate the new price of TR's ties: Let's assume the current price of TR's ties is P_TR. To calculate the new price after the price cut, we can use the formula: New price = Current price * (1 + Percentage change).
4. Calculate the price ratio (PR): The price ratio is the ratio of the new price of TR's ties to the current price of SQ's ties. PR = (New price of TR's ties) / (Current price of SQ's ties).
5. Calculate the percentage change in sales volume (SQ): To calculate the percentage change in sales volume for SQ's ties, we can use the formula: Percentage change in sales volume of SQ = (PR ^ CED) - 1.
6. Calculate the new sales volume of SQ: The new sales volume of SQ can be calculated using the formula: New sales volume of SQ = Current sales volume of SQ * (1 + Percentage change in sales volume of SQ).
7. Calculate the new revenue of SQ: The new revenue of SQ can be calculated using the formula: New revenue of SQ = New sales volume of SQ * Current price of SQ.
Please note that to fully calculate the effect, we need the current price of SQ's ties and the price elasticity of demand for TR's ties. Without these values, we cannot provide an accurate calculation.