elasticity- business use and limitations

• If demand for a product is price inelastic, a business should raise the price to increase total revenue.
• What should a business do if demand for its product is price elastic to increase total revenue?

  Reduce the price
• Steps a business can take to make supply more price elastic

  1️⃣ Reduce production lead times

  2️⃣ Increase stocks

  3️⃣ Expand spare capacity

  4️⃣ Make factors of production more substitutable
• A business must increase output if demand is price elastic and the price is expected to fall.
• Businesses aim for supply to be as price elastic as possible to respond to price changes.
• What does cross-price elasticity of demand (XCD) measure?

  Complements or substitutes
• If two goods are close complements, reducing the price of one may allow the business to raise the price of the other.
• If XCD is positive, the goods are substitutes.
• What might a business do if it identifies its product as a close substitute with another?

  Reduce price
• If a rival cuts their price and a business cannot follow, they must prepare for a decrease in output.
• Competing on non-price factors can reduce the substitute nature of goods.
• What does income elasticity of demand (YED) measure?

  Responsiveness to income change
• A negative YED indicates an inferior good.
• During a recession, a business producing an inferior good might consider increasing its price.
• Using competitor data for elasticity calculations may not be accurate because each firm is different.
• What is a major limitation of elasticity calculations in business planning?

  They are only estimates
• Survey responses used in elasticity calculations are always accurate.

  False
• Why might using past data for elasticity calculations be unreliable?

  Consumer habits change
• Elasticity calculations assume ceteris paribus, meaning only one factor changes.
• Why does price elasticity of demand (PD) vary along the demand curve?

  Consumer responsiveness changes