When the demand for a good is highly elastic with respect to price, how should a producer want to increase revenue?


  1. Answer:

    When the demand for a good is highly elastic, the producer can increase revenue by reducing the price slightly.


    Prices can either be Elastic, Inelastic, or Unitary.

    The assumption is that the scenario in the question is in a perfect market. A perfect market is one where there are numerous buyers and sellers and there is little or no gap in information about market conditions such as cost of input, prices of the competition, etc.

    When the demand for a product is elastic, it means that it is sensitive to changes in price. Price Elasticity is in degrees. When the demand for a product is highly elastic, it means that small changes in price lead to even greater changes in demand.

    So for the producer to increase revenue in the short run (all things being equal) all they need to do is reduce the price slightly. This will increase revenue because it most likely will translate to a more than proportionate increase in quantity demanded.

    Recall that markets are dynamic and the most predictable reaction of the other producers to this move will be an equal or even greater reduction in price in order to win back lost customers. Hence to sustainably maintain this position The producer will have to ensure that their product is sufficiently differentiated with unique value additions that are impossible or difficult to replicate.


Leave a Comment