If the elasticity measurement indicates unit elastic response, what affect does this have on the firm’s pricing policies? If the elastic measurement indicates an inelastic response, what affect does this have on the firm’s pricing policies? If the elasticity measurement indicates an elastic response what affect does this have on the firm’s pricing policies?
As the elasticity of demand for a product decreases, a company can increase the price with a smaller reduction in the demand. This leads to an increase in the sales revenue. On the other hand as the elasticity of demand increases things become more difficult for companies. They can no longer increase prices and expect the same number of people to buy the product. A price increase leads to a fall in sales revenue.
Price demand elasticity coefficients measure consumer sensitivity to changes in price, or, more simply, price sensitivity. If a product has elastic price sensitivity, then quantity demanded shifts with price changes in an inverse relationship: price declines ==> quantity demanded rises. Pricing policy will specify low prices within optimal cost parameters.
Elasticity in this context relates to the demand for products that a company might produce. If a product has a high elasticity, then the demand for that product will fluctuate. If a product is inelastic then the demand for that product is constant. This means that inelastic products are able to be raised in terms of their price, whereas the price of elastic products will have to fluctuate.
The more inelastic demand is for the firm's products, the more it should raise its prices. If demand is elastic, it should reduce prices. If demand is unit elastic, then it really does not much matter what price the firm charges.