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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.

  1. 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.
  2. 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.
  3. Non-pricing policy: When Price Elasticity of Demand is highly elastic, the firm can use advertising and other promotional techniques to reduce elasticity.

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Related Questions

What are practical uses of price elasticity of demand?

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Uses of cross elasticity of demand?

Cross elasticity in economics, also referred to as cross-price elasticity is used to measure the changes of the demand of a certain commodity to the price changes of another good.


Distinguish between price and income elasticity of demand?

distinguish between price elasticity of demand and income elasticity of demand


What are the 3 types of elasticity?

1)price elasticity of demand 2)income elasticity of demand 3)cross elasticity of demand


What is cross price elasticity demand?

Cross price elasticity of demand measures the responsivenss of demand for a product to a change in the price of another good.


If the elasticity of demand is equal to one then the demand is?

Unitary elasticity is when the price elasticity of demand is exactly equal to one.


Cross elasticity of demand?

In economics , the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good.


Distinguish between price elasticity and income elasticity?

The price elasticity refers to the change in demand due to the change in price. The income elasticity of demand on the other hand refers to the change in demand due to the change in income.


What is role of price elasticity of demand in business decision?

role of price elasticity of demand in managerial decisions


Are cross price elasticity of demand and price elasticity of demand same?

No, cross price elasticity of demand and price elasticity of demand are not the same. Price elasticity of demand measures how the quantity demanded of a good responds to changes in its own price, while cross price elasticity of demand measures how the quantity demanded of one good responds to changes in the price of another good. The former focuses on a single product, while the latter examines the relationship between two different products, indicating whether they are substitutes or complements.


What is cross price elasticity?

Cross price elasticity of demand measures the responsivenss of demand for a product to a change in the price of another good.


What is a true statementregarding the price elasticity of demand?

Price elasticity of demand is positively correlated with the existence of substitute goods.