Question

In: Economics

Why is elasticity important? How does a business determine whether to increase the price of the...

Why is elasticity important? How does a business determine whether to increase the price of the product it sells in order to increase revenues? When would you want to own a business that sells price-elastic products? Why?

Solutions

Expert Solution

Elasticity is important because it tell the responsiveness of price and demand. How price and demand relates to each other. How much the price change will change the Quantity demanded of the good.

The business determine the elasticity of the product that it sell , if the elasticity of demand is inelastic that the change in price does not change the quantity demanded , then business increase it's price to increase it's revenue but when the demand is elastic , the business know that increase in price will decrease the quantity demanded therefore the revenue might decrease.  

A price elastic products are very good for the business because as a owner of business , I should to have know that how much the price increase or decrease would increase or decrease the revnrev. Suppose the good has elastic demand, a small decrease in price will increase the quantity demanded of good and will increase the revenue .and I would like to know if I increase the price , the lesser quantity of good will be demand but the price increase will increase the revenue as well and offset the decrease of quantity demanded.


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