Why is the concept of price elasticity of demand important to a business?

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justaguide eNotes educator| Certified Educator

The concept of price elasticity of demand or PED is very important for a business in pricing its products appropriately to achieve the required sales revenue.

Price elasticity of demand is the percentage change in the quantity demanded for a percentage change in the price of the product. If a business is selling a product that has a very small PED it could, in theory, increase the price by a large extent with the corresponding decrease in demand being very small. This is the case for essential goods where the demand is relatively inelastic.

On the other hand, if the PED is large, even a small increase in price will reduce the demand by a large value. Businesses that sell products that have a relatively elastic demand have to price their products very carefully to obtain enough sales revenue to ensure that their operations are profitable.