PED in Practice: Flavour Brew’s Revenue Rollercoaster

Flavour Brew is a small, innovative brewery that specializes in producing a range of unique flavored beers. Business has been steady, but the management team is considering changes to their pricing strategy to maximize total revenue. Over the course of this activity, you will guide Flavour Brew through a series of pricing decisions, subsidies, and taxes, calculating the impact of each decision on total revenue and drawing relevant diagrams.

Part 1: The Price Increase Dilemma

Flavour Brew is debating raising the price of its flagship product, “Mango Haze” beer, in order to boost revenue. However, they’re unsure how this will affect demand. They’ve conducted a market survey and estimated that the Price Elasticity of Demand (PED) for Mango Haze is around 0.6, meaning demand is relatively inelastic.

  • The current price of Mango Haze is $5 per bottle, and they sell 10,000 bottles per month.
  • Flavour Brew is considering increasing the price to $6 per bottle.

Student Tasks:

  1. Calculate the change in quantity demanded
  2. Calculate the new quantity demanded
  3. Calculate the Total Revenue before and after the price increase
  4. Draw a demand curve: you should draw a demand curve showing the inelastic nature of demand. You should also indicate the original price and quantity, as well as the new price and quantity after the price increase.

Reflection Questions:

  • Did total revenue increase or decrease after the price increase? 
  • Explain whether Flavour Brew should go ahead with the price increase or not. 

Part 2: Government Subsidy – A Price Drop

Flavour Brew receives a government subsidy for being a small, local brewery. This subsidy allows them to reduce their prices without impacting their revenue directly. With this support, they decide to lower the price of Mango Haze down to $4 per bottle. (The PED is still -0.6, and the original price was $6.)

Student Tasks:

  1. Calculate the new quantity demanded
  2. Calculate the Total Revenue after the price drop
  3. Draw the new demand curve: You will need to include a supply curve now as well to show what caused the decrease in price. 

Reflection Questions:

  • How did the price drop affect total revenue compared to the original situation and the price increase?
  • Why might Flavour Brew be happy to keep the price lower, despite the reduction in revenue?

Part 3: The Government Tax Imposition

The government imposes a $3 unit tax on all alcoholic beverages, which raises the price of Flavour Brew’s Mango Haze from $4 to $7 per bottle. The company is concerned about how this price increase will affect their total revenue and how much quantity demanded will fall due to the higher price. They still receive the subsidy as a small business but do have to pay the unit tax for every beer they sell.

Student Tasks:

  1. Recalculate the quantity demanded after the tax.
  2. Draw the new demand and supply diagram, reflecting the impact of the tax, and thus the new equilibrium price level and quantity. 

Reflection Questions:

  • Explain how the imposition of the tax affected total revenue. 
  • How much tax revenue does the government gain from the consumption of Mango Haze?

Part 4: The Price Decrease Dilemma

Flavour Brew has introduced a new line of Tropical Zest Crisps, a light, crunchy snack with a hint of tropical fruit flavors such as mango, pineapple, and coconut. These crisps are quickly becoming a favorite for their unique taste. However, the management is now considering reducing the price to boost sales and total revenue.

They’ve conducted a market survey and estimated that the Price Elasticity of Demand (PED) for Tropical Zest Crisps is around 1.5, indicating that demand is relatively elastic.

  • The current price of Tropical Zest Crisps is $3 per pack, and they sell 20,000 packs per month.
  • Flavour Brew is considering decreasing the price to $2.50 per pack.

Student Tasks:

  1. Calculate the change in quantity demanded:

  2. Calculate the new quantity demanded:

  3. Calculate the Total Revenue before and after the price decrease:

  4. Draw a demand curve: You should draw a demand curve showing the elastic nature of demand. Indicate the original price and quantity, as well as the new price and quantity after the price decrease.