why it's important for a firm to have knowledge of elasticity of demand.
- ?Lv 51 decade agoFavorite Answer
Defining Elasticity of Demand
Elasticity of demand is an important variation on the concept of demand. Demand can be classified as elastic, inelastic or unitary.
An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small.
The formula for computing elasticity of demand is:
(Q1 – Q2) / (Q1 + Q2)
(P1 – P2) / (P1 + P2)
If the formula creates a number greater than 1, the demand is elastic. In other words, quantity changes faster than price. If the number is less than 1, demand is inelastic. In other words, quantity changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price.
Why is it important for a firm to have knowledge of elasticity of demand?
A firm, a factory, a manufacturer, or a retail store should know the elasticity of demand because it could generate more revenues for them. They have to understand the nature of their product so they can quickly apply strategy to accomondate market changes. If the demand of their product is elastic, the sales quantity rises or drops much quicker than the corresponding price change. This means their product could be easily replaced, and the consumer can quickly turn to other substitutes if one supplier decides to raise their price. In this case, the firm should be very cautious in adjusting the price especially when it's increasing. On the other hand, if the demand of the product is inelastic, the firm should be very cautious when it comes to lowering the price because they should know ahead of time that the sales revenue or quanity would not increase as quick as the price drop.
- 野鶴Lv 51 decade ago