How a business might use price elasticity of demand ped for pricing decisions?

Pricing Decisions by Business Firms: The business firms take into account the price elasticity of demand when they take decisions regarding pricing of the goods. This is because change in the price of a product will bring about a change in the quantity demanded depending upon the coefficient of price elasticity.

How does the PED apply on business and government decisions?

Price elasticity of demand is important for governments and companies to consider as they adjust prices for commodities in the market. If the demand for a product is elastic, it might be a bad idea to raise the price much, although the right price cut could significantly increase demand.

Why is a knowledge of PED important for decision making by governments and firms?

PED is important for business decision making as it determines the effect of price changes on total revenue. When a business is considering increasing or decreasing price, it is important to know what will be the resulting impact on its sales revenue.

How does the government use PED?

The concept of price elasticity of demand is important for formulating government policies, especially the taxation policy. Government can impose higher taxes on goods with inelastic demand, whereas, low rates of taxes are imposed on commodities with elastic demand.

How do firms use elasticity and revenue for decisions?

The owner has two things to account for when deciding whether to raise the price, one that increases revenue and one that decreases it. Elasticity helps us determine which effect is greater. Referring back to our table: When you increase price, you increase revenue on units sold (The Price Effect).

How is PED useful to consumers?

The price elasticity of demand measurement allows to know the consumers sensitivity to price changes, in order to apply an effective price strategy and estimate the weight of the price in purchase choices.

How can a business use knowledge of elasticity?

Elasticity also communicates important information to consumers. If the market price of an elastic good decreases, firms are likely to reduce the number of goods or services they are willing to supply. If the market price goes up, firms are likely to increase the number of goods they are willing to sell.

How do firms use elasticity?

How does price elasticity of demand affect total revenue?

If demand is elastic at a given price level, then should a company cut its price, the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue.