What are the possible disadvantages of price elasticity of demand to firms?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Price elasticity of demand is only a disadvantage to a business if the business does not know how to determine how elastic the demand for its products is.  Otherwise, elasticity of demand is simply a condition of a market economy.

Price elasticity of demand refers to how much the quantity demanded of a product changes when its price changes.  We know that, all other things being equal, people will buy less of a product if its price rises.  But we do not know how much less.  This is where elasticity of demand comes in.  If the price changes and the quantity demanded changes a great deal, we say that the demand for the good was elastic.  If the price changes and quantity demanded stays relatively stable, we say that demand was inelastic.

Firms can be at a disadvantage if they do not know if their demand is elastic or inelastic.  If demand is inelastic, a firm should raise prices.  If it is elastic, the firm should lower prices.  If the firm does not know which thing to do, it can lose money.  Thus, a poor understanding of price elasticity of demand (and not the concept itself) can be a disadvantage to companies.

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