A good example of price elasticity of demand

A great news article about the problems faced by Hovis bread would make a useful example of price elasticity of demand for business students.

I wonder whether a class of business students now what the price of a loaf of bread is?

Take the case of our regular purchase from Tesco online: Hovis Best Of Both Medium White 800g. How much for a medium-sliced loaf?

You could get each student to make their guess on a slip of paper, submit them into a box and then produce a frequency distribution analysing the guesses compared to the correct answer - £1.15 (or £1 per loaf if you purchase using a multi-buy promotion).

Hovis is a brand leader, with a strong market share. Back in September 2007, it was the first bread brand to set its retail price at £1, subsequently raising it to £1.15.

The problem for Hovis was that the two main competitor brands didnt match the price rise at first, prefering to wait until December 2007.

So what was the effect on Hovis sales? A substantial fall in demand, including its other bread products, as it lost market share to Kingsmill and Warburtons. This is described in the financial pages today, after the owner of Hovis (Premier Foods) announced losses and a sharply reduced dividend for shareholders.

There is much in the Hovis news story that is relevant to business students. Price elasticity of demand is one relevant topic. The effect of increased raw material prices (in Hovis’ case - wheat) on profit margins is another. Cash flow also comes into play. Premier Foods has had to raise new finance to support what is described as a weak balance sheet.

Read this Times article for further details