The Importance Of Elasticity Of Demand In Business

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Economics is a social science that studies the compilation, allocation and circulation of economic resources. Business vendors use the study of economics to assist in construction of a business decision. In a business, demand and supply is the most important factor that determines long term or competition in entrepreneurs. So the elasticity of demand and supply also help in making decision of a business be it join company, partnership or solely.
Elasticity of demand refers to the sensitivity of quantity demanded with respect to changes in another outside factor and is a measure of the responsiveness of one economic variable to another. In economics, the elasticity of demand for a certain good or service is represented by the demand
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In a business, if the demand for a commodity is inelastic due to the less change in quantity demanded because of the change in price, then the seller can change the price but if the demand for a commodity is elastic, the seller cannot change the price of a commodity. According to Green (2014), it takes decisions regarding price or not the firm should have idea about price elasticity of demand for the product and its substitutes, complements and increasing of price will be beneficial only if the demand for its product is inelastic, as the increase in price will increase total revenue. Raising price will be beneficial if the elasticity of demand for its substitutes is low but if it is large, consumer will shift to other substitutes as the firm raise the price for that product. The availability of substitutes is the most important factor influencing the elasticity of goods and services as the more the substitutes the more elastic the demand will…show more content…
In short period the elasticity is generally low and inelastic compared to long period as it takes time for the consumers to adjust their taste, preferences and habits. In long period consumer can adjust with tastes’ preferences, consumption pattern and their new substitutes, so its demand is elastic. The price elasticity of demand for a particular goods or services has huge implications for business. For example, if the price of the coffee is increases to 10 percent and if the demand fell by 5 percent as a result, organization would then know that the price elasticity of that particular good is elastic. But if they also increase the price of dairy milk chocolate by the same amount, and if price remained the same then they would have a relatively inelastic product. Business must therefore make pricing decisions based on these elasticity

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