Elasticity and sales revenue
As we have seen, one of the most important uses of elasticity is to see the impact that a change in price will have on the demand for a good. This will affect the amount of revenue a firm can earn from a good or service. The table below summarises the possibilities:
| Price elasticity value | Price change | Impact on firm's revenue | Explanation |
|---|---|---|---|
| Elastic | Increase | Fall | Elastic demand will mean that when price increases, demand will fall by more than the price increased. This means a fall in revenue. |
| Elastic | Decrease | Increase | Elastic demand will mean that when price falls, demand will increase by more than the price decreased. This means an increase in revenue. |
| Inelastic | Increase | Fall | Inelastic demand will mean that when price increases, demand will fall by less than the price increased. This means an increase in revenue. |
| Inelastic | Decrease | Increase | Inelastic demand will mean that when price falls, demand will increase by less than the price decreased. This means a fall in revenue. |
If a firm makes a product which is price elastic, the firm will need to consider carefully before increasing the price as part of a change in the marketing mix. However, if the product is price inelastic, the firm may be able increase price and gain sales revenue.
n.b. Remember that the elasticity varies at different prices.
