Assume that in a business meeting your colleague says that price should always be lowered in...

Assume that in a business meeting your colleague says that price should always be lowered in order to increase total revenue. How would you respond, knowing that this business sells products that have different price elasticities?

Expert Solution

The price elasticity of demand is the responsiveness of change in quantity demanded due to a change in prices of the goods. Elastic demand means that the consumer is more responsive to change in quantity demanded when price changes. Inelastic demand means that the consumer is less responsive to change in quantity demanded when the price changes.

When the price elasticity of demand is elastic, the increase/decrease in price will lead to a decrease/increase in total revenue. When the price elasticity of demand is inelastic, the increase/decrease in price leads to an increase/decrease in total revenue.

When a business is selling a product that has different price elasticities then it should charge higher prices to that segment of consumers that have inelastic demand for the good (when the prices increase, the demand for the good does not decrease by a large amount). And, it should charge a lower price for the good to that segment of consumers that have elastic demand (when price increases, quantity demanded decreases by a large amount).

Hence, by chagring a higher price to consuemrs that have inelastic demand, total revenue will increase by a large amount. And, by charging lower price to the consumers that have elastic demand, a small decrease in price will lead to increase inquantity demanded by a larger amount and the total revenue will increase.

Rahul Sunny answered 1 year ago

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