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In the short run, demand may be very different from potential supply (production). Such mismatches can...

In the short run, demand may be very different from potential supply (production). Such mismatches can be addressed by adjusting quantity demanded, quantity supplied, or prices, (advertisement?)

How do you decide which of these is best?

Please give an example with numbers.

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Answer #1

We can address this by finding the price elasticities of Quantity demanded.

If the absolute value of price elasticity of Quantity demanded is < 1, we increase the price. Since it is less than 1, the quantity demanded wont decrease much and we can increase profits.

If absolute vaue of price elasticity of demand is > 1, we reduce the price. Since an increase in price would push customers to other subsitutes, the quantity demanded will become very less, this will lead to a decrease in profit. Hence if the absolute value of price elasticity of quantity demanded is > 1, we increase the price.

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