The price elasticity of demand could also assist with determining if a product has “perfect elasticity” or “Perfectly Inelastic“. Perfect elasticity occurs when even the slightest change in price affects the quantity purchased by consumers.
Perfect inelasticity refers to scenario where customers demand same quantity of a good no matter how much the price changes. Therefore, if a firm calculates the price elasticity of demand for a certain product and the value from the calculations is infinite. Then the product has perfect elasticity. If the value from price elasticity of demand calculation is zero, then the product is considered to have perfect inelasticity. These two concepts are important because if the firm is having difficulties selling a certain product. They know that product has perfect elasticity they could lower price of that product in effort to increase the demand. It is in accordance with the “law of demand.”
Price elasticity of demand:
To explain relationship between total revenue and price elasticity of demand people need to understand what total revenue is. Total revenue is the amount paid by buyers and received by sellers of a good. Total revenue is computed as the price of the good times the quantity sold. Since price is part of the equation for total revenue, it is easy to see the relationship between the two. How a change in price could affect the total revenue of a firm. Price elasticity of demand, firms could determine if product that they are selling is “price elastic” or “price inelastic.” If the price elasticity value is greater than 1, then the demand for that product is sensitive to price changes. If the price elasticity value equals to 1, then the demand is consider “unit elastic.” If price elasticity value is less than 1, then the demand is consider price inelastic.
What are its impacts?
The price elasticity of demand for a product can have a positive or negative impact on a firm’s total revenue. For example, if a firm determines that their product is price elastic. They could lower the price of that product to increase its’ demand. This will negatively impact the firm’s total revenue because lowering the price of any product automatically lowers firm’s total revenue. Furthermore, because the firm is now producing more due to the lower price it will increase their costs of production. Due to the additional inputs that are require to produce the additional quantities. If a firm determines that their product is price inelastic. The firm could increase price of that product to impact positively the firm’s total revenue because regardless of the price. Consumers will still have the same demand for that product.
One of the main goals of businesses owners is to have his or her product reach a state of equilibrium. These have to be both in price and in quantity. They do not want to have a surplus or shortage of that product in the market. here are lots of things which you have to understand in business.