Question

What are the implications of the price elasticity of demand result for 1- consumers 2- business?

Answer 1

Price elasticity of demand refers to the responsiveness of quantity demanded with respect to changes in price. Price elasticity of demand is measured using the following formula:

Price elasticity of demand = % change in quantity/% change in price

The demand tends to be elastic in case the good is luxury. So, the % change in quantity demanded is higher than % change in price. On the other hand, in case of necessary goods, the quantity demanded does not change proportionately as much as changes in price. So, in the case of inelastic demand, the % change in quantity demanded is lower than the % change in price. So, the more a good is necessary the more inelastic is its demand.

In the case of businesses, a firm can make pricing decisions on the basis of elasticity of demand. If the demand is elastic, the total revenue decreases if the firm charges a higher price and total revenue increases when the firm charges a lower price. On the other hand, if the demand is inelastic, the total revenue increases if the firm charges a higher price and total revenue decreases when the firm charges a lower price.