The Village Shop Pricing Dilemma
A village shop sells two products: rice and cooking oil. The shopkeeper buys rice at Nu. 40 per kg and oil at Nu. 120 per litre. Last month, the shop sold 200 kg of rice and 80 litres of oil. The total revenue was Nu. 17,600. The shopkeeper is considering raising the price of rice by 10% and lowering the price of oil by 5%. She estimates that rice sales will fall by 5% and oil sales will rise by 10% due to these price changes. She wants to know whether the new pricing strategy will increase or decrease total revenue, and what other factors she should consider.
1. Calculate the current selling prices and total revenue, then determine the new revenue under the proposed changes.
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Current prices: rice = Nu. 40 per kg, oil = Nu. 120 per litre. Current revenue = (200 × 40) + (80 × 120) = 8,000 + 9,600 = Nu. 17,600. New rice price = 40 × 1.10 = Nu. 44 per kg. New oil price = 120 × 0.95 = Nu. 114 per litre. New rice quantity = 200 × 0.95 = 190 kg. New oil quantity = 80 × 1.10 = 88 litres. New revenue = (190 × 44) + (88 × 114) = 8,360 + 10,032 = Nu. 18,392. The new revenue is higher by Nu. 792.
2. Explain the concept of price elasticity of demand in this context and advise the shopkeeper on other factors to consider.
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Price elasticity of demand measures how responsive quantity demanded is to a change in price. Rice appears to be inelastic (a 10% price rise leads to only a 5% fall in quantity), so revenue rises. Oil appears elastic (a 5% price cut leads to a 10% rise in quantity), so revenue also rises. However, the shopkeeper should consider: the cost of goods (profit, not just revenue), local competition, customer goodwill, and whether the estimated quantity changes are reliable. She should also check whether demand patterns are seasonal and whether storage costs change with quantities.