Knowledge of price elasticity of demand might help a producer by allowing that producer to know whether to raise or lower their prices. If the producer knew the price elasticity of demand for their product, they would be able to know whether a change in price would increase their revenues.
The law of demand tells us that the quantity demanded of a product varies inversely with its price. That is, when the price goes up,...
Knowledge of price elasticity of demand might help a producer by allowing that producer to know whether to raise or lower their prices. If the producer knew the price elasticity of demand for their product, they would be able to know whether a change in price would increase their revenues.
The law of demand tells us that the quantity demanded of a product varies inversely with its price. That is, when the price goes up, the quantity demanded goes down and the quantity demanded goes up when the price goes down. This tells us that the demand curve has a negative slope, but it does not tell us how steep that slope is. In other words, it does not tell us how much the quantity demanded will change if the price changes.
Price elasticity of demand tells us how steep the slope of the demand curve is. It tells us how much the quantity demanded will change with a change in price. If the slope is not very steep (if demand is inelastic), it will be better to raise prices because the quantity demanded will not drop much and total revenues will increase. Conversely, if the slope is very steep, we might want to lower prices because this will cause people to buy so much more of our product that our revenues will increase. It is important for a producer to know the price elasticity of demand of their product so they can make choices about whether to change their prices.
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