How might knowledge of price elasticity of demand be of use to a producer?

Producers use price elasticity of demand in order to best determine the price of a product. Products should not be priced too low as the producer will not be able to cover his/her own costs, and products should not carry too high of a price that would scare away the consumer.

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Producers use price elasticity of demand in order to determine the optimal selling prices for their products. If a good carries too high of a price, one may either go with a different company for a similar good, buy a substitute, or go without the product.

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Producers use price elasticity of demand in order to determine the optimal selling prices for their products. If a good carries too high of a price, one may either go with a different company for a similar good, buy a substitute, or go without the product.

A producer who is in competition with another company may be able to lower one's prices through more efficient work practices or finding cheaper sources of raw materials. As the price for the good decreases, demand should increase if demand for the product is elastic. If the demand increases at a higher rate than the price change, then the product is said to have an elastic demand. Food and discounted clothes are said to have elastic demands since customers are always looking for a sale where they can stock up on these goods. If the demand does not increase at a higher rate than the price change, demand for the good is said to be inelastic. Utility costs are often inelastic in demand since the demand does not increase or decrease with changing rates.

Producers should be mindful not to lower their prices to the point of creating losses. All producers rely on both fixed and variable costs—each good sold has an optimal selling price that will maximize profits while also leading to increasing sales. Producers should be aware of sales at various price points in order to maximize profits.

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The knowledge of price elasticity of demand will help a producer determine the pricing for their goods. For example, if the product has a substitute in the market, it is better for the producer to set a price that is close to the substitute good's selling price. If the producer sells the item for more, they are likely to lose out to the competitor because consumers will buy the substitute good instead. Such a good is said to have an elastic demand.

On the other hand, if the good has an inelastic demand, the producer can sell it for a high price to maximize on profit. Inelastic demand means that consumers are less responsive to changes in price. Luxury goods have an inelastic demand because consumers consistently want the prestige associated with such items.

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Producers have an interest in putting goods and services on the market at prices consumers are willing to pay. If they charge too little for their good or service, their profits will be lower than they could be. If they charge too much, consumers will go to their competitors, or choose a substitute. The change in the amount of a good or service that people will buy--the demand--relative to price increases or decreases is called price elasticity. An item, gasoline for example, that people will continue to demand and purchase even when its price goes up is called price inelastic. If people will stop buying it if its price goes up, we say that it is price elastic. In a market economy, producers determine at what price they put a good or service on the market. If they produce a good that is highly price elastic, they should know that they can't increase the price of this good or service--consumers won't buy it anymore. So understanding the nature of demand for a particular good or service is important for producers who are trying to make a profit.

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Knowledge of price elasticity of demand might help a producer by allowing that producer to know whether to raise or lower their prices.  If the producer knew the price elasticity of demand for their product, they would be able to know whether a change in price would increase their revenues.

The law of demand tells us that the quantity demanded of a product varies inversely with its price.  That is, when the price goes up, the quantity demanded goes down and the quantity demanded goes up when the price goes down.  This tells us that the demand curve has a negative slope, but it does not tell us how steep that slope is.  In other words, it does not tell us how much the quantity demanded will change if the price changes.

Price elasticity of demand tells us how steep the slope of the demand curve is.  It tells us how much the quantity demanded will change with a change in price.  If the slope is not very steep (if demand is inelastic), it will be better to raise prices because the quantity demanded will not drop much and total revenues will increase.  Conversely, if the slope is very steep, we might want to lower prices because this will cause people to buy so much more of our product that our revenues will increase.  It is important for a producer to know the price elasticity of demand of their product so they can make choices about whether to change their prices.

 

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