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Milestone Two Tips on Critical Element “Price Elasticity of Demand: Pricing Decisions”

In this portion of your paper you will need to accurately assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growths. A good place to look to help you answer this question is in section 6.3 of your text: The Relationship between Price Elasticity of Demand and Total Revenue (pg. 181-184). When you write this section you should already have used several of the 5 determinants of elasticity of demand to determine whether or not your firm’s product faces an elastic or inelastic demand curve. If you are struggling with that section, look for an announcement posted this week that goes through these 5 determinates at length.

Before we get into the relationship between elasticity of demand and total revenue, we should first understand what total revenue is and how it is calculated. Total revenue is the total amount of funds a seller receives from selling a good or service, which is calculated by multiplying the price per unit by the number of units sold.

If the demand for your product is inelastic, then the price and total revenue move in the same direction. This means that an increase in price would increase the total revenue for that product, and a decrease in the price would decrease. Why? Let’s think back to the definition of inelastic demand: the percentage change in quantity demanded is less than the percentage change in price. So, if the quantity demanded isn’t changing much, then the revenue is going to be influenced by the change in price. If you the demand for your product is inelastic you should increase the price in order to increase revenue.

If the demand for your product is elastic, then the price and revenue move in opposite directions. In other words, if you increase the price of an elastic good the total revenue will fall, but if you decrease the price then the total revenue will rise. Thinking back to the definition of elastic demand: when the percentage change in quantity demanded is greater than the percentage change in price. This means that even though you are decreasing the price the additional quantity you will be able to sell will increase the total revenue; remembering that total revenue = price x quantity sold. So if you are facing elastic demand for your product you should decrease the price in order to increase revenue.

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