The more price elastic is the demand for a good or service, the higher will be...

The more price elastic is the demand for a good or service, the higher will be the acutal margin. Do you agree with this statement? Explain.

Expert Solution

No, the more price elastic is the demand for a good or service, the lower will be the actual margin. Price elasticity of demand shows the responsiveness of change in quantity demanded due to changes in prices of the goods. This means that as the elasticity of a good increase, people will be more responsive to the change in prices of that good. For example, the price elasticity of demand for flight tickets is elastic in a way that a small price increase will lead to a decrease in its demand to a great extent as people will switch to trains instead. On the other hand, the price elasticity of necessities like food items is inelastic in a way that even if the prices of basic food items increases, people cannot decrease their demand as those food items are the necessity.

Thus for those goods whose demand is more inelastic, it is easy to set a higher price and earn a higher profit margin as it won't affect the quantity demanded of that good.

Rahul Sunny answered 8 months ago

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