Why is price elasticity of demand important to firms?

Price elasticity is important to firms because it influences the price the firms will charge for their products or services. Additionally, it will help businesses develop strategies, maximize profit, and reduce risk.

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We'll begin with two scenarios to illustrate price elasticity of demand. First, there is a particular movie you want to buy on DVD, but the price is rather high when the movie is first released, so you decide to wait for a while before you buy. The next time you check, the price has gone up even a little further, and you notice that there are quite a few copies still on the rack. Apparently, other potential customers have also decided to wait. The store has noticed this, too, and the next time you shop, you are surprised to see that the price has dropped significantly. It is well within your payment comfort zone, so you snatch up the second to last copy. This is a prime example of an “elastic” product. The higher the price, the less demand there is for the product. As the price drops, however, the demand increases.

Now think about another scenario. You are required to make an overnight trip for business, and you need to put gas in your car. You notice that gas prices have risen some...

(The entire section contains 4 answers and 1091 words.)

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