With proper illustrations explain in what way concept of elasticity of demand has implication on manegerial decision making process?

Answer 1

Elasticity is a powerful and elegant concept and measures the response or sensitivity of one economic variable against change in another. Such measurement is important to producers because it in turn helps them to understand the impact of an economic action undertaken and thereby helps in decision making. One economic variable is price whose response is often sought on another economic variable which is quantity demanded. A producer such as a bakery owner may be interested in finding out how a price rise affects how many loaves of bread he sells in his store. The bakery owner may be thinking, "If I raise the price of the bread in my store by Rs.5, will this reduce significantly the number of breads that I sell, or will it just reduce it by an insignificant number?" As a business owner, this is indeed an important question to him because he does not want to adopt a pricing policy, if possible, that will make him lose too many customers and erode the revenue from sales. Understanding the concept of price-elasticity of demand can help him in his decision making process of whether to raise the price or not.