Pricing Strategy: Price elasticity and willingness to pay · Price Elasticity of Demand
How strongly buyers react to price changes, what drives that sensitivity, and what it means for revenue and pricing decisions.
Try 3 questions
1. What does the price elasticity of demand measure?
- How quickly a price changes over time
- How much costs rise as output grows
- How much quantity demanded responds to price
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Answer: How much quantity demanded responds to price
It is the percentage change in quantity demanded divided by the percentage change in price, a measure of buyers' price sensitivity.
2. A product's price rises 10% and the quantity sold falls 20%. What is its price elasticity of demand?
- -20, so demand is perfectly elastic
- -2, so demand is elastic
- -0.5, so demand is inelastic
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Answer: -2, so demand is elastic
Elasticity is -20% divided by +10%, which gives -2. Any value beyond -1 in size means quantity reacts more than proportionally, so demand is elastic.
3. If demand for a product is elastic, what happens to total revenue when the seller raises the price?
- Total revenue stays the same
- Total revenue falls
- Total revenue rises
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Answer: Total revenue falls
With elastic demand the percentage drop in units exceeds the percentage gain in price, so price times quantity shrinks.
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