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The Importance of Understanding Price Elasticity - Essay Example

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According to Perloff, elasticity is the percentage change in a variable in response to a given percentage change in another variable. There are various types of price elasticity. The most commonly used…
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The Importance of Understanding Price Elasticity
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The Importance of Understanding Price Elasticity

Download file to see previous pages... This elasticity is used to measure how responsive the quantity demanded is or how willing the consumers are to buy the firm’s product if there is a given change in price. Inelastic products, meaning products whose quantity demanded would not be significantly affected by a change in price, include cigarettes and food items. Whereas elastic products, meaning products whose quantity demanded would be significantly affected by a change in its price, include iPod, MP3, television and other such consumer items considered a luxury or a want.
Firms can use information about their product’s elasticity of demand to determine their price structure and their competition policy in the market. This information is extremely valuable for the firm’s marketing department as it allows them to determine if the people will continue buying their product if the price is increased or will there be a dramatic decline in the sales. For example if the demand is inelastic for a cigarette company then its marketing department will know that there won’t be a significant decrease in the quantity demanded by the customers to an increase in price. Hence they can afford to charge a higher price without losing too many customers. One thing that needs to be noted here is that when the price of a product is relatively inelastic, a firm’s revenue would rise because of the fact that an increase in price which not reduce quantity demanded significantly thus their revenues would rise. On the other hand, had the demand for that product been elastic, they would be losing revenue because quantity demanded would fall. Here, cigarettes are considered to be a relatively inelastic, hence the marketing and the finance department would be aware of the fact that they can increase potential revenue by an increase in the level of prices depending on the degree of elasticity. If the value of elasticity is closer to zero, then they can increase the ...Download file to see next pagesRead More
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