Why is the concept of price elasticity of importance to the firm?

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.
Adam Keuvelaar
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