Question

If a firm faces price-inelastic demand for its products, and can therefore raise its price and increase its total revenue, shouldn't it generally do so? Explain your answer.

Answer 1

Price inelasticity indicates that buyers and by extension, demand are more tolerant to price changes. When a firm increases the prices for inelastic goods, the total revenue increases, however would result to a small decrease in quantity demanded. Conversely, when the prices for inelastic goods are lowered, the quantity demanded wouldn't offset the fall in price and would lead to lesser revenue. The firm would then suffer loss and should not really reduce the price of its goods. Thus the firms that sells inelastic goods or services can increase prices, selling a little less however making higher revenues