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Prepare a list of uses of price elasticity of demand in taking business decisions.

Prepare a list of uses of price elasticity of demand in taking business decisions.

Solution

Price elasticity of demand guides several business decisions, the main uses being:

  1. Product pricing: set a low price where demand is elastic and a higher price where it is inelastic.
  2. Price discrimination: charge a low price in the elastic-demand market and a high price in the inelastic one.
  3. Pricing of public utilities: a high price for inelastic services, a low price for elastic ones.
  4. Pricing of joint products: price each jointly produced good according to its own elasticity.
  5. Demand forecasting: predict how future demand will change as price changes.
  6. Shifting the tax burden: pass a commodity tax onto buyers if demand is inelastic, but absorb more of it if demand is elastic.

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