If you are running a business, it can be helpful to know about price elasticity of demand. This can tell you whether you should increase or decrease prices for products in your business.
Price elasticity of demand has to do with what happens to the quantity demanded for your product if you change its price. We know that people will buy more if you lower prices and buy less if you raise prices. However, we do not know how much more or less they will buy. This is where price elasticity of demand comes in to play.
Price elasticity of demand tells you how much the quantity demanded changes when the price changes. If the demand for a good is inelastic, you can raise the price and people do not reduce their purchases very much. By definition, when demand is inelastic, if you raise prices, you actually get more revenue. By contrast, if demand for your good is elastic, a change in price leads to a large change in buying. If you reduce the prices, people will buy so much more that you will actually make more money.
From this, you can see why you would need to know about elasticity of demand in order to run a business effectively. If you know the elasticity of demand for your products, you can know whether you should change your prices and, if so, how you should change them. This will allow you to make the maximum possible revenue for your business.
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