Why is the concept of price elasticity of demand an important concept in business management?

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pohnpei397 eNotes educator| Certified Educator

The concept of price elasticity of demand is a very important concept in management because it helps managers know how to price the goods or services that they sell. 

The law of demand states that consumers will be willing and able to buy less of a product as the product’s price goes up.  However, the law of demand does not tell us how much less of the product customers will buy if the price goes up by a given amount.  If the price of the product goes up 10%, will the quantity that customers buy drop by 10%?  Will it drop by 1%?  Will it drop by 15%?  This is where the concept of elasticity comes in.  Price elasticity of demand is a measure of how much the quantity of a product that consumers demand will change in response to a change in price.

It is very important for a manager to know this.  If you were managing a store and you knew that you could raise the price of an item 10% and only lose 1% of your sales, you would do it.  But you would not raise the price if you knew that a 10% price increase would cause you to lose 15% of your sales.  Thus, knowledge of the price elasticity of demand tells us whether to raise prices on our products.  This is why it is an important concept for business managers.