Question

Consider the Law of Demand, the Law of Supply, and the Price Elasticity of Demand. Explain how a solid understanding of these, when combined, can help a business improve its performance (e.g. increase sales revenue). ➢ Combine theory with practical examples. (i already got the ans but can u bit elaborate properly.

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Answer 1

Law of demand states that there is inverse relationship between price and quantity demanded. Rise in price leads to fall in quantity demanded and fall in price leads to rise in quantity demanded.

Law of supply says that there is positive relationship between price and quantity supplied. Rise in price leads to rise in quantity supplied.

Further, price elasticity of demand measures the degree of responsiveness of quantity demanded to change in price.

Elasticity of demand is critical concept that can be used to increase profitability of business. Whether firm should increase price or not depends on the elasticity of demand. If elasticity of demand happens to be less than unit or inelastic demand, rise in price would invariably lead to rise in total revenue of firm. Thus, firm should go for rise in price if demand happens to be inelastic.

Further, if demand is elastic, it would not be profitable for firm to increase price as it will reduce total revenue. For example, demand for electricity is inelastic, if firm increases its price level, total revenue will rise invariably.