29 Information on the price elasticity of demand is particularly important to ma
ID: 1151302 • Letter: 2
Question
29 Information on the price elasticity of demand is particularly important to managerial decision making because: the higher the price elasticity of demand for a product is, the more profitable it will be to produce more of it. depending on the elasticity coefficient, decision makers will immediately know if a price change will cause profits to increase or decrease. it allows one to predict how total revenue will respond, i.e., increase or decrease, to a change in price. as the price elasticity coefficient approaches one, profits will increase.
Explanation / Answer
Elastic demand means demand is highly responded to the change in prices. So when demand is price elastic 1% decrease in prices results in increased quantity demand y more than 1%. As quantity increase is more than a decrease in prices so total revenue, as well as total profit, will be increased. IN a similar way if the price is increased by 1%, demand will be decreased by more than 1% which decreases the total revenue as well as total profit. So when the coefficient of price elasticity of demand is greater than 1, profit will be increased if the price is decreased and profit will be decreased if the price is increased.
When price elasticity of demand is inelastic, demand is less responsive to changing prices. When the price is increased by 1%, demand is decreased by less than 1%. As price increased more than fall in demand so total revenue is increased. If the price is decreased by 1%, demand will be increased by less than 1%. So total profit will be decreased. So when the coefficient of price elasticity of demand is less than 1, total profit will be increased when the price is increased and total profit will be decreased when the price is decreased.
We can conclude that by looking at the coefficient of price elasticity of demand it can estimate whether profit will be increased or decreased. So it is important to managerial decision making.
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