Q: The concept of price elasticity of demand is important to the firms. Discuss.
How elastic the demand a product is determines how a firm should operate to maintain profitability. For example, for a highlyinelastic good, such as prescription medication, pharmaceuticalcompanies are able to charge a high premium to recover theirinitial investments. Consumers have few substitute goods to resortto, and are thus forced to pay a higher price. In the case of ahighly elastic good, such as corn or other standardized products, asmall price…
e will result in the loss of a large number ofconsumers. In this case, firms should avoid price competition andfocus on non-price attributes. For certain consumer goods, forinstance, companies try to lower the demand elasticity on theirproducts by differentiating their products by branding,advertising, etc.
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