Question

Consider the Price Elasticity of Demand. Explain how a solid understanding of this, in conjunction with other economics concepts, can help a business improve its performance (e.g. increase sales revenue)

Answer 1

Price elasticities of demand tells the relationship between price and quantity demanded

it is given by the ratio percentage change in the quantity demanded to the percentage change in the price

it is basically of two types that are elastic demand and inelastic demand

elastic demand is that type of demand in which even there is small change in the price causes heavyvchange the quantity demanded

for inelastic demand in which even is a very high change in the price causes very low change in the quantity demanded

if we talk from the revenue perspective then if demand is elastic in nature then revenue and demand moves in the same direction

it means if price increases then revenue will increase and vice versa

If the demand is inelastic in nature then price and revenue will move in opposite direction that means the price increases then revenue will decrease and vice a versa

this concept is widely used in many companies and firms to understand whether the product is a price sensitive or not

for example if any good comes under the elastic demand it means the consumers are price sensitive about

if price increases then consumers will not demand it more positive

if the product is price insensitive then consumers will spend on it irrespective of their high price

for example water, gasoline