Explain why it is so important for a business to understand the concept of price elasticity and be able to measure this for its products.
What will be an ideal response?
The choice of what prices will maximize revenues and profits is very important to businesses. Knowing what the price elasticity of demand is for their products will help them choose the best prices. If demand is highly elastic, total revenues will rise if price is reduced because consumers have many substitutes and they will respond in a big way to a sale. If demand is very inelastic, they can increase revenues by increasing price because not all of their customers will switch to substitutes.
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A theory asserts that consumers will purchase less of a good at higher prices than they will at lower prices, ceteris paribus. However, when the average price of cars increased throughout the 1990s, more cars were purchased. Which of the following best explains the apparent conflict between theory and data? a. The ceteris paribus assumption is valid
b. It is likely that variables other than the price and quantity of cars demanded were changing. c. The theory is valid. However, the price and quantity data gathered by researchers was clearly measured incorrectly. d. The theory must be invalid.
Models should:
A. attempt to include every detail of the situation being studied. B. attempt to describe a situation with perfect accuracy. C. not be applied to microeconomics. D. describe a real life situation accurately.