Question

Price elasticity of demand is an extremely important concept for a firm because it tells managers what will happen to revenues if the price of a product changes.

Consider how the price elasticity of demands for you product will influence on your managerial decision making.

Answer 1

Total Revenue is related to the price elasticity of demand. This is because a change in price leads to a change in quantity and therefore, a change in revenue, The direction of the change in revenue for a given change in price can be determined with the help of the price elasticity of demand.

When the demand is price elastic then TR moves in the opposite direction as the price change. This means a fall in price raises revenue while an increase in price leads to a fall in revenue.

On the other hand, if demand is price inelastic, then the movement is in the same direction. This means if the price is increased revenue increases and if the price is decreased revenue decreases.

And when the demand is unitary elastic then the change in price does not change revenue in either direction. The revenue remains constant.

This means that if the product's demand is price elastic then the manager will choose to reduce the price to increase revenue. And similarly, if the demand was price inelastic, then to increase the revenue the manager will decide to increase prices. Depending on the price elasticity of demand the managerial decision related to the price of the product will vary.