Uses of Price Elasticity Information

Price elasticity information is useful for a number of purposes. Obviously, firms are required to be aware of the price elasticity of demand when they price their products. For example, a profit-maximizing firm would never choose to lower its prices in the inelastic range of the demand curve. Such a price decrease would decrease total revenue and at the same time increase costs, because the quantity demanded would rise. A dramatic decrease in profits would result. Even over the range in which demand is elastic, a firm will not necessarily find it profitable to cut price. The profitability of a price cut in the elastic range of the demand curve depends on whether the

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