How does the concept of demand elasticity contribute to a business's pricing strategy?
1.It encourages lower prices for inelastic goods
2.It helps a firm decide how much price increase the market can bear
3.It discourages competition in the market
Both 2 and 3 are correct statements about how the concept of demand elasticity contributes to a business's pricing strategy. However, the concept does not necessarily encourage lower prices for inelastic goods (statement 1).
1. Demand elasticity measures the degree of responsiveness of quantity demanded to a change in price. Inelastic goods have a relatively low elasticity, meaning that changes in price have a smaller effect on quantity demanded. This knowledge can help businesses set higher prices for inelastic goods because even if they increase the price, the quantity demanded will not decrease significantly.
2. Understanding demand elasticity can help a firm decide how much of a price increase the market can bear. If demand is relatively elastic (sensitive to price changes), the firm needs to be cautious about increasing prices too much, as it may result in a significant decrease in quantity demanded. On the other hand, if demand is relatively inelastic (insensitive to price changes), the firm can consider increasing prices without losing a substantial number of customers.
3. The concept of demand elasticity encourages competition in the market, rather than discouraging it. When firms understand the demand elasticity of their products, they can strategically compete on price. For example, if a firm's product has a relatively elastic demand, meaning customers are sensitive to price changes, the firm may choose to lower its prices to gain a competitive advantage over other firms in the market. This encourages competition among businesses.