Question

How does the price elasticity of demand impact the firm’s pricing decisions and revenue growth?

Answer 1

Price elasticity of demand affects the ability to increase or decrease the price of the product . .Price elasticity of demand is a change in quantity demanded with change in price of the product keeping all other prices constant.It is the reflection of consumer behaviour. Firms use price elasticity as a tool in their target market segments. If the rise in price leads to fall in demand, this means elasticity of demand is negative or vice versa. if the demand is inelastic, firm can have more varied mix of pricing or can use discounting to increase the semand of their product. If the market is less sensitive to the prices where the product is differentiated and thus has high prices, in such case price increase will not afect the demand whereas if the market is more sensitive which means more substitutes are available within market, the increase in price will negatively affect the demand. Using spreadsheet analysis, a firm can develop demand curves which will show that at what point demand start falling. Through price elasticity of demand a firm may assume and predict the impact of changes in prices on the revenue of the firm. If the demand is inelastic, then the increase in prices to rise will lead to increase in revenue but if the demand is elastic, then increase in prices will result in loss of revenue.The revenue of the firm will be maximized where where the elasticity of demand is unitary elastic. To collect most revenue price elasticty of demand is most important