Why is price elasticity of demand important in modern business?  

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The price elasticity of demand is an economic concept that describes the change in demand that accompanies a change in price. If a good has an elastic demand, consumers will not be willing to purchase as much of it if its price rises. On the other hand, if a good...

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The price elasticity of demand is an economic concept that describes the change in demand that accompanies a change in price. If a good has an elastic demand, consumers will not be willing to purchase as much of it if its price rises. On the other hand, if a good or service has an inelastic demand, people will continue buying it at higher prices, probably because they need it.

Understanding, and being responsive to, demand elasticity is important for businesses at any time, and especially if they are in a highly competitive economic sector. If, for example, a property manager or owner calculates that she can rent apartments at $1,000 a unit when, in fact, few are willing to rent at that price, then she will have to lower the rent and may lose her investment in the process with the resulting falling revenues. She failed to account, in short, for the elasticity of housing demand.

So, understanding the principle of price elasticity of demand is important to businesses in pricing the goods and services they offer.

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Price elasticity of demand is a measure that tells how the quantity of an item that can be sold varies when the price of the item varies. If a firm raises its price and its revenues decline, the item it is selling has elastic demand. The more the revenues go down, the more elastic it was.

By contrast, if the firm raises its prices and revenues go up, the demand for the item was inelastic.

As you can see from this definition, it is important to know if demand for a product is elastic or inelastic. Knowing this will tell a business how to set its prices for maximum profit.

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