Question

In 4-6 sentences, discuss how understanding the concept of price elasticity of demand is useful for a business owner/firm operating in any market structure. Copying the definition or restating the definition of elasticity will result in loss of points. (What does price elasticity of demand tell the firm in terms? How can they use that information to their benefit? Discuss the types of elasticity?)

Answer 1

Price elasticity of demand is the responsiveness of consumers to a change in the price of the commodity. Price elasticity of demand is broadly classified into three categories - elastic demand, inelastic demand and unitary elastic. Understanding the price elasticity of demand can be greatly helpful to any business or firms. If the demand for a commodity is inelastic, consumers do not respond as much to a change in the price of the commodity, they continue to consume the same amount (or slightly lesser or more) with regards to an increase or decrease in the price of the commodity (in the case of normal goods). Thus the firm owners can change the price without having to worry about the change in the demant of the commodity.