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Discussion on: Product price increase to increase the revenue of firm, what do you think?

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Guell (2015), in their book Issues in Economics Today, elasticity is a measure of how much buyers and sellers respond to changes in market conditions. It allows us to analyze supply and demand with greater accuracy. Here, a manager wants to increase revenue of his firm. The reason how the he would increase revenue is explained below:

Reason I - elastic demand curve

With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.

Figure 1: When demand is elastic

Illustration:

Ep = dQ/dP * P/Q
= (12-8)/(200-250) * (250+200)/(8+12)
= - (180/100)
= - 1.8
= 1.8 > 1, elastic

At, combination A, Total Revenue = 200 * 12 = Rs. 2400

At, combination B, Total Revenue = 250 * 8 = Rs. 2000

Hence, if the demand of product is elastic then the manger should not raise the price in order to increase firms’ revenue.

Reason II - inelastic demand curve

With an inelastic demand curve, an increase in the price leads to an increase in quantity demanded that is proportionately larger. Thus, total revenue increases.

Figure 2: When demand is inelastic

Illustration:

Ep = dQ/dP * P/Q
= - 0.81
= 0.81 < 1, inelastic

At, combination A, Total Revenue = 200 * 12 = Rs. 2400

At, combination B, Total Revenue = 250 * 10 = Rs. 2500

Hence, if the demand of product is inelastic then the manger should raise the price in order to increase firms’ revenue.

To state more precisely, the concept of price elasticity of demand is highly applicable for managers of the company at the time of make pricing decision of their firm’s products and services. The core concept of it depicts that if the product of the company is inelastic then the manager can increase the price in order to increase the revenue of the company. By increasing the price of the product the revenue can be raised. Similarly, if the product appears to be elastic then it would be better that manger does not increase the price of the product.

Reference

Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-0078021817