Question

Explain why knowledge of price elasticity of demand would be valuable to a producer of a good or service.

Answer 1

Elasticity of demand is the measure of the change in quantity demand for a good due to a unit change in price of the commodity.

For producer, it will be very much beneficial to evaluate the elasticity of demand for its product. The producer must focus on elasticity before changing its price. The relationship between price elasticity of demand and total revenue helps the producer to decide whether it should change its price and if yes then in what direction:

• If demand is elastic, then price and total revenue will move in opposite direction that is if producer wants to raise its total revenue then it should decrease its price.
• If demand is inelastic, then price and total revenue will move in same direction that is if producer wants to raise its total revenue then it should increase its price.
• If demand is unit elastic, then any change in price does not cause any change in total revenue so producer don't have to change the price.

So the above relatonship explains why elasticity's knowledge is important for producer.