Question

Question- You own your business, and your research indicates that the price elasticity of demand for your product is 3.5. What pricing strategies should you follow, and why?

Answer 1

Answer-Price elasticity is the percentage change in quantity demanded divided by the percentage change in price. Economists look at the absolute value of the elasticity number, and if the number is greater than 1.0 the demand is classified as elastic; 3.5 price elasticity indicates that demand is very elastic. The best strategy for this company is to reduce the price. If the price falls by 10 percent, for example, the increase in quantity demanded will be larger than that percentage move and will increase total revenue. Demand is very elastic when consumers have many substitute goods, so raising price in this case will reduce total revenues.