Price Elasticity and Prediction

Knowledge of price elasticity is important for two reasons:

(i)      It helps firms to predict the impact of price change on unit sales, and

(ii)     Guides the firms' profit maximisation pricing decision.

Managers are, concerned with whether a change in price in either direction will increase or decrease revenue. We know that elasticity is percentage change in quantity demanded divided by percentage change in price. Therefore, if the former is larger, then the quantity effect is stronger and will more than offset the opposite price effect. Thus, it can be said that the elasticity coefficient influences the revenue of the firm. Now what does this coefficient entail for revenue? 

if price decreases and, in percentage terms, quantity rises more than the decrease in price, then total revenue will increase and vice versa. Economists have classified elasticity coefficients in five categories. 

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