Question

1.

​a) Precisely define market demand elasticity

​b) Explain how and why demand elasticity should play an important role in ​​​​​business pricing decisions. Use a combination of text plus diagrams that are clearly

​​explained by your text to answer question 1b.

​c) What specific market conditions might lead you to conclude that the markets ​

​​your company serves are either elastic or inelastic.

Answer 1

1

a) Market Demand Elasticity refers to the degree of responsiveness of the quantity demanded of a good towards changes in its price level.

b)

The elasticity of demand is very crucial to every business in terms of making decisions about their product. It helps them to know the answer of concerns like How much will be increase in the product sales if the business owner decides to increase price of the product by some percentage. In such a case, if the demand for company's product turn out be elastic, then raising the price would lead to fall in the Total Revenue because the quantity effect would dominate the price effect. Such elastic demand is shown in below figure where the curve is flatter.

On the other hand, if the product has inelastic demand, then raising the prices makes more sense as the total revenue will increase. The demand curve in this case is steeper.

c)

Following are the demand conditions and the resultant elasiticities:

- If changes in the product's price do not impact the product quantity to be sold, then supply becomes Perfectly Inelastic if demand rises

- If change in the quantity does not change with changes in the price, then supply curve becomes perfectly elastic if the demand rises.

So, it is effect on the price or quantity demanded that tells the company whether the demand / supply is elastic and inelastic