answersLogoWhite

0


Best Answer

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.

User Avatar

Wiki User

16y ago
This answer is:
User Avatar
More answers
User Avatar

Wiki User

11y ago

A products elasticity refers to how much demand there will be for a product if there is a change in it's price.

Bottled water is highly elastic. If companies were to double the price of bottled water than many people would not purchase the water because there are many cheaper options available, like tap water.

Gasoline is a very inelastic good. Even if the price of gas were to double or triple people would still buy it because there are no substitutes available. Certainly people would drive less and use less gas but they would not be able to stop buying gas because it is a good everyone needs in today's world.

So, you need to know how elastic your good or service is so you know how much flexibility there is in your price. Can you increase your price and still sell the same number of units?

This answer is:
User Avatar

Add your answer:

Earn +20 pts
Q: How do you use the knowledge of elasticity to increase the revenue of a firm?
Write your answer...
Submit
Still have questions?
magnify glass
imp
Continue Learning about Economics

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.


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


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.


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.


Why do firms try to sell more products or to sell them at higher prices?

To increase revenue. Revenue = Price x Quantity sold. So if a firm sells more products and/or sells products at a higher price, revenue will increase.

Related questions

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.


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


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.


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.


What firms could raise prices and expect an increase in revenus?

a firm whose product has an elasticity of 0.31


When a firm's marginal revenue is zero what can be said about the elasticity of demand for the output of the firm A. Demand is inelastic. B. Demand is elastic. C. Demand is unit elastic.?

Demand is unit elastic.


How do you determine the optimal level of advertising?

the optimal level of advertising expenditure for the firm is determined where the marginal revenue increase in costs of advertising are equal to the marginal increase in revenue


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.


Why do firms try to sell more products or to sell them at higher prices?

To increase revenue. Revenue = Price x Quantity sold. So if a firm sells more products and/or sells products at a higher price, revenue will increase.


A price cut will increase the revenue a firm receives if the demand for its product is?

Either elastic or inelastic


What is the equilibrium of a firm?

The equilibrium of a firm depends with the elasticity of a demand curve.


When an organization can get optimal production?

this is obtained when a firm equates its marginal revenue to its marginal cost.At a level of output where MR exceeds MC,then the firm should increase output since the addition to revenue is greater than the addition to revenue.Where a firm's MR is less than its MC,the firm should lower its output since the addition to costs is greater than the addition to revenue.