How pricing policies are arrived at under different price elasticities?
Answer:
if PED is elastic (>1) people lower prices to increase revenue
if PED is inelastic (<1) people increase prices to increase revenue
if PED is unitary (=1) maintain current price
If PED is perfectly elastic (infinity) firms cant do anythin but follow the market price as charging an higher price will result in a loss of all revenue
If PED is perfect inelastic (=0), firms can charge as high of a price as demand is not responsive towards changes in price.
draw an inelastic & a elastic demand curve then see the changes in area under the curve ( total revenue) to illustrate it graphically when prices change.
however, this is not neccesarily the case as there are many other factors such as costs when increasing production & redundancies when decreasing production.
Moreover, the might be legal limits such as minimum & maximum prices.
however, under the ceteris paribus assumption (for simplicity) all this are assumed to remain constant.
this is because demand for perishable goods maybe inelastic so even when prices are held constant at times of rising prices people do not buy as much as their incomes increase. one such instance is food, we wont spend the total increase in our income in food alone. the higher we earn the lower as % of our income it constitutes
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