Price Elasticity of Demand

For a firm looking to boost its profits, it must consider how a change in price might affect the total profits. The most important concept to this analysis is price elasticity of demand. The underlying principle of price elasticity of demand is that a change in the price of a good will result in a change in demand. The degree to which this occurs is the rate of elasticity. Price elasticity of demand is determined by dividing the change in demand by the change in price. Alternatively, a variety of price points can be graphed and the slope of the demand curve can be determined (NetMBA, 2010).

In either case, a company that is seeking to maximize its revenues will need to determine the point at which it has achieved the optimal price and demand. This is the point at which the price multiplied by the...
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