The Milk Cooperative's Second Price Rise
Meenakshi is the marketing manager of a district milk cooperative in coastal Odisha. In April the cooperative raised the price of its 500 ml toned milk pouch from ₹25 to ₹27.50, and daily sales in its 60 retail booths fell from 40,000 pouches to 36,000 pouches. In the same month it ran a promotion on curd, cutting the price of a 500 g pack from ₹40 to ₹36; curd sales rose from 5,000 packs to 6,000 packs per day. The board is pleased with the curd promotion and now wants to raise the milk price again, to ₹30, to cover rising procurement costs from dairy farmers. The finance officer warns that the cooperative's total milk revenue has barely moved. The cooperative has no competitor within 20 km for pouched milk, but private dahi brands are sold in the same booths and at nearby sweet shops. The board meets next week to decide.
1. Using the proportionate (percentage) method, calculate the price elasticity of demand for toned milk and for curd, classify each, and show what happened to the cooperative's revenue from each product. What does this tell the board?
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Toned milk
- % change in quantity = (36,000 − 40,000) ÷ 40,000 × 100 = −10%
- % change in price = (27.50 − 25) ÷ 25 × 100 = +10%
- e = −10 ÷ +10 = −1, so |e| = 1: demand is unit elastic.
- Revenue: 40,000 × ₹25 = ₹10,00,000 before; 36,000 × ₹27.50 = ₹9,90,000 after. Revenue fell by ₹10,000.
Curd
- % change in quantity = (6,000 − 5,000) ÷ 5,000 × 100 = +20%
- % change in price = (36 − 40) ÷ 40 × 100 = −10%
- e = 20 ÷ (−10) = −2, so |e| = 2 > 1: demand is elastic.
- Revenue: 5,000 × ₹40 = ₹2,00,000 before; 6,000 × ₹36 = ₹2,16,000 after. Revenue rose by ₹16,000.
What it tells the board: where demand is unit elastic, a price rise leaves total revenue almost unchanged (the small fall shows the elasticity is only approximately 1 over a discrete price change, and is not a licence to keep raising price). Where demand is elastic, a price cut raises revenue. The milk price rise bought no extra revenue, so any improvement in the cooperative's position must come from lower cost per litre, not from the price.
2. The board proposes to raise the milk price again, from ₹27.50 to ₹30. Using the elasticity you estimated, predict the effect on quantity and revenue, and give two reasons why the prediction might be wrong. What would you advise?
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Prediction. % change in price = (30 − 27.50) ÷ 27.50 × 100 = 9.09%. If |e| ≈ 1, quantity falls by about 9.09%: 36,000 × 0.9091 ≈ 32,727 pouches. New revenue ≈ 32,727 × ₹30 ≈ ₹9,81,800, i.e. about ₹8,000 less than the ₹9,90,000 now earned. Revenue would rise only if demand were inelastic (|e| < 1) at this higher price, which the data do not support.
Why the prediction may fail
- The estimate is an arc elasticity between ₹25 and ₹27.50; elasticity at ₹30 is a different point, and demand generally becomes more elastic as the price (and the household's budget share) rises, so the loss could be larger.
- Other things were not held constant - family incomes, festival demand, the private dahi promotion, or a change in procurement cost could all shift the demand curve and be mistaken for a price effect.
Advice. Do not raise to ₹30 on this evidence. Either hold the price and attack cost per litre, or raise in a small step and track booth sales for a full month before any further change. If different buyers can be separated (home delivery, bulk supply to tea shops), a higher price for the less price-sensitive group is safer than a blanket rise.
3. Explain why curd demand is price elastic while milk demand is unit elastic in this district. What additional information would you collect before the board meeting?
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Why the difference
- Substitutes: private dahi brands sit in the same booths and in sweet shops, so a curd price cut pulls buyers across; pouched milk has no rival within 20 km, so milk buyers have nowhere to go, which pushes milk elasticity towards 1 or below.
- Nature of the good: milk is a daily necessity bought in fairly fixed household quantities; curd is closer to a discretionary item, so purchases respond more to price.
- Storage and home production: curd can be set at home, giving another route of escape; milk cannot be stored or made at home.
- Budget share and habit: the milk bill is a routine, unavoidable expense; a curd promotion is a visible saving, so the response is sharper.
- Time: a one-month promotion can shift curd habits quickly; milk habits change slowly, which flattens the measured response.
Extra information to collect
- Prices charged by the private dahi brands in the same month - without this, the 20% curd response may be a cross-price effect, not the cooperative's own price cut.
- Household incomes and income elasticity, since milk demand rises with income.
- Month-wise sales for the previous year, to separate seasonal and festival effects from price effects.
- The cooperative's own cost per litre and per kg, to test whether the price rise is needed at all. One month and one price change per product is thin evidence; the estimates should be presented to the board as approximate.