Question

In: Economics

Provide a definition of the price elasticity of demand and explain why knowing the price elasticity...

Provide a definition of the price elasticity of demand and explain why knowing the price elasticity for her product is useful to the firm's manager.

Solutions

Expert Solution

Price elasticity of demand can be defined as the responsiveness of quantity demanded with respect to change in the price .

It is basically described and distinguished into three categories that are -

elastic demand, inelastic demand and unit Elastic demand.

Elastic demand is when even the small change in price cause in high change in the quantity demanded, for example, normal goods.

Inelastic demand is when there is even very high change in the price but in the response, quantity demanded changes is very less.For example, basic needs.

Unit elastic demand is when price and quantity demanded to change in the same proportion.

When it comes to a Firm Manager ,it is very important to have a Thorough idea about price elasticity of demand .

Suppose he deals in a normal good item then he knows that if he suddenly increase the price of that good then many customers will not buy product.

similarly goes for the inelastic demand .

It also helps in the predicting the future demand and for optimum decision making for a firm manager in the limited resources he has.


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