Question

A firm should never raise or lower the price of its product before considering the price elasticity of demand for that product."

Argue for or against the above statement.

Answer 1

PE = percent change in quantity demanded/percent change in price

When the demand is price inelastic (abs (PE) < 1), raising the price leads to an increase in total revenue (the quantity demanded decreases by a lesser proportion in comparison to the increase in price) whereas lowering the price would decrease total revenue. Similarly, when the demand is price elastic (abs (PE) > 1), lowering the price leads to an increase in total revenue (the quantity demanded increases by a greater proportion in comparison to the decrease in price) whereas raising the price would decrease total revenue.