Canteen food

Due to the availability of substitutes which is the high school canteen food, the demand for JC canteen food is price elastic (1 < lEpl < infinity). When demand is price elastic, as price changes, quantity demanded changes more than proportionately. This is because as the price of the JC canteen food increases, students will prefer high school canteen food as it is a close substitute. Thus, the quantity demanded has a greater effect on total revenue than the change in price. Take for example, an increase in price from $2 to $3 as shown in figure 1.

At the price of $2, there will be a demand of 15m units and the total revenue is $30m which is given by the area 0CEG. When price increase to $3 (50% increase), quantity demanded falls more than proportionately to 10m units which is 67% decrease. The total revenue decrease to $15m as shown by area 0ABF. Since area DEFG is greater than area ABCD, the total revenue has decreased.

As these 2 goods are closely substitutes, the cross elasticity is always positive which means a decrease in the price of one good will lead to a fall in the quantity demanded for the other. For instance, when the high school canteen vendors decrease the price of the food they sell, JC canteen vendors have to slash price to prevent students from turning to cheaper alternative. At the same time, it is wise for the JC canteen vendors to differentiate their products such as to improve on the quality of the food they are selling.

Done by: Siaw Kai Min