How does the knowledge of elasticity help in the effectiveness of a business?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

There are two kinds of elasticity that might be important to a business.  These are price elasticity of demand and cross elasticity of demand.

Price elasticity of demand measures how much the quantity demanded for a product will rise or fall if the price of that product changes.  This can be important information for a business.  Let us imagine that the demand for a given product is inelastic.  This means that the quantity demanded of the product will not fall very much if its price rises.  In such a case, it makes sense for the business to raise the price of that product.  If it does so, its revenues will rise.  If, on the other hand, the demand for a product is elastic, it might make sense to lower the price of that product so that people will buy more and revenues will increase.

Cross elasticity of demand measures how much the demand for one product changes when the price of another product changes.  For example, when the price of one good goes down, the demand for its complements rises.  If a golf course lowers the price of its cart rentals, people might buy more rounds of golf.  If a business knows the cross elasticity of demand for its various products, it can operate more efficiently.  It can reduce the price of some items to increase demand for other items. 

In both of these ways, the knowledge of elasticity can increase a business’s effectiveness.