How can understaning elasticity of demand help a firm in its Essay

How can understaning elasticity of demand help a firm in its planningExplain how the different levels of elasticity influence behaviour within different market structures - Essay Example Elasticity of demand explains the extent to which consumers are willing to relinquish their consumption of a particular product due to price increase and vice versa. Upon setting goals and objectives of the firm, the management ought to strategise and plan operations that facilitate goal achievement. As noted earlier, revenues can be raised by either raising quantity supplied via expansion or altering prices. Quantity supply increment is associated with increase in costs and thus requires careful analysis and hence a long-term decision. On the other hand, due to the negative effect that price has on sales; its increment does not necessarily result to increased revenue, but rather depends on the proportionate change in quantity demanded. For that reason, decision maker ought to consider elasticity of demand before initiating a price alteration. As matter of fact, increase in price may either raise or lower total revenue, though it has no effect on cost. Moreover, planners ought to understand the determinants of elasticity and work, to their advantage, either to increase or reduce it. In an inelastic demand situation, a change in price results to a less than proportionate change in sales. A rational firm may therefore increase price as it adds to revenues. However, as price the consumer surplus reduces and hence consumer’s responsiveness to price increases (Guru, 2010). At the point where elasticity becomes unitary, it makes no economical sense to raise price, since the impact on revenues is negligible if not zero. Alternatively, reducing prices on elastic commodities increases revenues and vice versa. Remarkably, in an elastic situation, the change in price is offset b the more than proportionate change in quantity demanded. Among many other factors, elasticity ought to be a key variable in pricing policies. Secondly, elasticity of demand can be used to predict availability and