What is the relationship between price elasticity and revenue?

What is the relationship between price elasticity and revenue?

The relationship between price elasticity and revenue is crucial in understanding how changes in price affect total revenue. When demand is elastic, a decrease in price leads to an increase in total revenue. Conversely, if demand is inelastic, a price decrease results in a decrease in total revenue.

Can you give me an example of elastic demand?

Sure! A classic example of elastic demand is luxury goods, like designer handbags. If the price of a designer handbag decreases, many more consumers are likely to buy it, significantly increasing total revenue.

What about inelastic demand?

An example of inelastic demand is essential medications. Even if the price of a life-saving drug increases, consumers will still purchase it because they need it, leading to an increase in total revenue despite the higher price.

How can businesses use this information?

Businesses can use this information to set optimal pricing strategies. By understanding the elasticity of their products, they can adjust prices to maximize revenue, whether by lowering prices for elastic goods or raising them for inelastic goods.