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Why is the concept of price elasticity of importance to the firm?
Wiki User
∙ 13y ago
Firms can use price elasticity of demand (Ped) estimates to predict:
-The effect of a change in price on the total revenue & expenditure on a product.
-The likely price volatility in a market following unexpected changes in supply - this is important for commodity producers who may suffer big price movements from time to time.
-The effect of a change in a government indirect tax on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer.
-Information on the price elasticity of demand can be used by a business as part of a policy of price discrimination (also known as yield management). This is where a monopoly supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel or yield management by many of our domestic and international airlines.
-Depending on the elasticity of a product, the firm can find an alternative marketing strategy that they can adopt to increase revenue.
Wiki User
∙ 13y ago
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Price elasticity importance to individual firm and government?
Price elasticity has a lot to do with how firms and governments can predict costs and profits. The greater the elasticity, the more uncertain their financial projections will be.
Importance of elasticity of demand and supply?
exploitation of monopoly power in market-the extent to which a firm or firm with monopoly power can raise price in market to extract consumer surplus and it into extraprofit
Assume that the price of elasticity demand is -2 for a certain firm's product If the firm raises price the firm's manager can expect total revenue to?
decrease
How does price elasticity of demand affect a firm's pricing decisions?
The price elasticity of demand affects a firm's pricing decisions by determining the optimal profit margin. Price elasticity of demand describes the rate of change of demand in response to a change in price. The higher it is, the higher demand changes in respond to price; lower means very little change. For a good with low elasticity, it is easier to profit off marking-up the price because demand falls little in response to a price increase. For a high elasticity, prices should approach equilibrium because straying from equilibrium results in a higher change in demand than in price.
Total Outlay Method for measurement of Elasticity of Demand?
According to this method the degree of elasticity of demand is measured by comparing firm's revenue from consumer's total outlay on the goods before the change in the price with after the change in the price.
Price elasticity importance to individual firm and government?
Price elasticity has a lot to do with how firms and governments can predict costs and profits. The greater the elasticity, the more uncertain their financial projections will be.
Importance of elasticity of demand and supply?
exploitation of monopoly power in market-the extent to which a firm or firm with monopoly power can raise price in market to extract consumer surplus and it into extraprofit
Assume that the price of elasticity demand is -2 for a certain firm's product If the firm raises price the firm's manager can expect total revenue to?
decrease
How does price elasticity of demand affect a firm's pricing decisions?
The price elasticity of demand affects a firm's pricing decisions by determining the optimal profit margin. Price elasticity of demand describes the rate of change of demand in response to a change in price. The higher it is, the higher demand changes in respond to price; lower means very little change. For a good with low elasticity, it is easier to profit off marking-up the price because demand falls little in response to a price increase. For a high elasticity, prices should approach equilibrium because straying from equilibrium results in a higher change in demand than in price.
WHAT are Uses of PRICE ELASTICITY OF DEMAND?
There are several uses of Price Elasticity of Demand that is why firms gather information about the Price Elasticity of Demand of its products. A firm will know much more about its internal operations and product costs than it will about its external environment. Therefore, gathering data on how consumers respond to changes in price can help reduce risk and uncertainly. More specifically, knowledge of Price Elasticity of Demand can help the firm forecast its sales and set its price.Sales forecasting: The firm can forecast the impact of a change in price on its sales volume, and sales revenue (total revenue, TR). For example, if Price Elasticity of Demand for a product is (-) 2, a 10% reduction in price (say, from $10 to $9) will lead to a 20% increase in sales (say from 1000 to 1200). In this case, revenue will rise from $10,000 to $10,800.Pricing policy: Knowing Price Elasticity of Demand helps the firm decide whether to raise or lower price, or whether to price discriminate. Price discrimination is a policy of charging consumers different prices for the same product. If demand is elastic, revenue is gained by reducing price, but if demand is inelastic, revenue is gained by raising price.Non-pricing policy: When Price Elasticity of Demand is highly elastic, the firm can use advertising and other promotional techniques to reduce elasticity.
Total Outlay Method for measurement of Elasticity of Demand?
According to this method the degree of elasticity of demand is measured by comparing firm's revenue from consumer's total outlay on the goods before the change in the price with after the change in the price.
What is the equilibrium of a firm?
The equilibrium of a firm depends with the elasticity of a demand curve.
What are the uses of price elasticity of demand to the business firms and to the government?
Elasticity measures help the sales manager in fixing the price of his product. The concept is also important to the economic planners of the country. In trying to fix the production target for various goods in a plan, a planner must estimate the likely demand for goods at the end of the plan. This erequires the use of income elasticity concepts.The price elasticity of demand as well as cross elasticity would determine the substitution between goods and hence useful in fixing the output mix in a production period. The concept is also useful to the policy makers of the government, in particular in determining taxation policy, minimum wages policy, stabilization programmer for agriculture, and price policies for various other goods (where administered prices are used).The managers are concerned with empirical demand estimates because they provide summary information about the direction and proportion of change in demand, as a result of a given change in its explanatory variables. From the standpoint of control and management of external factors, such empirical estimates and their interpretations are therefore, very relevant.
Price elasticity of demand is known to be -2.5 and the firm lowers price by 5 percent What is the expected impact on the total revenue of the firm?
Price elasticy is defined as percentage change in quantity divided by the percentage change in price. The relationship is usually negative as you increaes price you can expect less sales. With price elasticity of -2.5 that means for every one percent increase in price(.01), I expect my quanity sold to decrease by 2.5 percent (.025). If the firm lowers the price by 5% then I would expect and increase of (5 * .025) = .125 or a 12.5% increase in total revenue. Remember all else equal.
IF A firm supplied 3000 pens at the rate of rs 10next month due to a rise of in the price to 22rs per pen the supply of the firm increases to 5000 pens WHAT IS the elasticity of supply of the pens?
Answer=1.32 is this correct?
Who would raise prices on exports to increase profits and why?
That would depend on the elasticity of demand. If the elasticity were sufficiently high, a firm would want to increase export prices to increase their total revenue; if else, they would want to lower or maintain their price.
How do you use the knowledge of elasticity to increase the revenue of a firm?
To my understanding, theoretically, the knowledge of elasticity can help in the revenue of the firm. However, it can be limited in practical terms as many other factors can affect revenue for the firm. In theory, if we are considering elasticity, what we are considering is the price of the good. You might need a graph to better understand the concepts of elasticity and revenue. Lets say the good has an elastic demand curve. This means that the demand curve is relatively flat, and the goods have a wide variety of substitutes. If this is the case, a good strategy will be to decrease the price of the good. If the price is decreased, and if the demand curve is elastic, theoretically the revenue of the firm will increase. From my interpretation, if the good has got a lot of substitutes, the firm can increase it's revenue by decreasing the price of it's good. This is because consumers are very sensitive to price changes, this means a small decrease in price, will mean a lot of customers will come and purchase the good. This can increase the revenue for the firm. On the other hand, if the demand curve is inelastic, an increase in the price of the good will increase the revenue for the firm. A demand curve that is inelastic is rather steep, and have few substitutes for the consumers. This means that consumers have little choice over product variety. An increase in the price of the product by the firm, will have few customers respond to it. What this means essentially is that the current customers will not repsond to changes in the price, hence they will not reduce the quantity demanded a lot, and they will not mind paying the high price. This can thus increase the revenue for the firm. In summary, if the product that a firm faces is elastic it's wise to decrease the price, as it will increase the revenue for the firm. On the other hand, if the product that a firm faces is inelastic, it's wise to increase the price of the good, as it will increase the revenue for the firm. Hope this helps.
