A business sells two types of tea: black tea and health tea.
Analyse how the data in Appendix C will affect how this business might change the price to charges for each type of tea to increase its sales revenue.
Key points:
You must use Appendix C and make reference to it.
You must mention the approach to price changes (increase/decrease)
You must link back to how your approach will lead to an increase in revenue.
Structure used:
The example answer uses KPEEEE + PEEEE
Knowledge, Point, Explain x 4
Example answer
The data in Appendix C is concerned with price elasticity of demand. Price elasticity of demand is a measure used to detail how sensitive or reactive the demand for a product is in relation to its price. One way in which the data in Appendix C may affect how a tea business, selling black tea may change prices, is through suggesting a possible lowering of the price of the tea. This is because the PED of black tea is -1.2, meaning demand is elastic. This suggests that a decrease in price would lead to a larger increase in quantity demanded, resulting in higher revenue. Therefore, to increase revenue, the business should consider lowering the price of black tea, leveraging its high price sensitivity to attract more customers.
Another way in which Appendix C may affect the approach to the pricing strategy in regards to herbal tea is through the suggested price increase, as supported by the data. Herbal teas
has a PED of -0.5, indicating inelastic demand. This means that consumers are less responsive to price changes, so an increase in price would lead to a smaller drop in demand. For instance, a 10% price increase might only reduce demand by 5%, increasing total revenue overall. As a result, the business should raise the price of herbal tea to maximise revenue, taking advantage of the product's low price sensitivity while ensuring competitor pricing is considered.
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