Economics – The allocation of resources - Price elasticity of demand (PED) | e-Consult

Explanation: The relationship between PED and revenue is crucial for firms when making pricing decisions. As explained previously, PED measures how responsive quantity demanded is to a change in price. This responsiveness directly impacts the firm's revenue.

Elastic Demand and Revenue: With elastic demand (PED > 1), a firm faces a risk when increasing prices. While a price increase might initially boost profit margins per unit, the significant decrease in quantity demanded will likely outweigh this benefit, leading to a net decrease in total revenue. Therefore, firms with elastic demand often avoid price increases or carefully consider them, focusing instead on other strategies like product differentiation or marketing to maintain sales volume.

Inelastic Demand and Revenue: With inelastic demand (PED

Implications for Pricing Decisions:

• Firms should analyze the PED of their products before making pricing decisions. This analysis can be conducted through market research and historical sales data.
• Firms with elastic demand should be cautious about raising prices. They might consider alternative strategies to maintain sales volume.
• Firms with inelastic demand have more flexibility in pricing. They can potentially increase prices to boost revenue, but must consider the potential impact on consumer behavior.
• Firms can use pricing strategies to influence PED. For example, marketing campaigns can increase the perceived value of a product, making demand less elastic.