Question

Tom is the brand manager of a major real estate company selling residential apartments in the United Arab Emirates. Discuss at least three applications of his knowledge of price elasticity of demand that can influence the profitability of his brand.

Answer 1

The price elasticity of demand is the measure of change in demand due to a change in price. A business firm has to analyze the price elasticity of demand for its product before taking price decisions. Because the price elasticity has greater influence on the total revenue and profitability of the firm.

When the demand is inelastic (Ped = <1) a rise in price increase total revenue and profit but a fall in price cause fall in revenue and profit. This is because when price increase the proportionate fall in demand will be less than the proportionate rise in price. The demand does not decrease considerably with rise in price. Thus the firms earn more revenue. But a fall in price cause revenue loss since the proportionate increase in demand will be lower than the proportionate fall in price. The demand does not increase considerably with fall in price.

When the demand is elastic (Ped=>1) the best way for a firm to increase total revenue and profit is a reduction in price. Under the situation of elastic demand the proportionate change in demand will be larger than the proportionate change in price. Thus a given fall in price causes a larger increase in demand. But a given price rise cause larger fall in demand.

When the demand is unitary elastic (Ped=1), a change in price does not cause any change in total revenue and profit. A fall in price will be accompanied same percentage increase in demand and a rise in price will be accompanied by the same percentage fall in demand.