Explain price elasticity of demand and its importance in pricing decisions.

• A. The responsiveness of quantity demanded to price changes; affects pricing strategy and revenue.
• B. The total revenue divided by price
• C. The number of substitutes available
• D. The change in consumer tastes over time

Answer: (A)

Price elasticity of demand measures how sensitive buyers are to price changes. It’s the percentage change in quantity demanded divided by the percentage change in price. This matters for pricing decisions because it forecasts how revenue will respond to price moves. If demand is elastic, a price drop leads to a larger percentage increase in quantity and total revenue can rise; if demand is inelastic, a price increase can raise revenue even if quantity falls only a little. Elasticity varies by product, substitutes available, whether the item is a necessity, and over time, so firms use it to decide when to price higher, when to discount, and how to project effects on sales and profits. The other ideas describe revenue per price, substitutes, or changing tastes, but they don’t capture the responsiveness of quantity demanded to price changes.