The price elasticity of demand helps determine the effect of price changes on a firm's _____

Question

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The price elasticity of demand measures the responsiveness of consumers to changes in price. If demand is elastic, a small change in price will lead to a larger change in the quantity demanded. This means that if a firm raises price in such a scenario, total revenue will decrease because the increase in price will not be enough to offset the decrease in quantity sold. Conversely, if demand is inelastic, a change in price will have little impact on the quantity demanded. In this case, if a firm raises price, total revenue will increase because the increase in price will more than offset the decrease in quantity sold. Therefore, the price elasticity of demand is crucial in determining the effect of price changes on a firm's total revenue.

The Price Elasticity of Demand Helps Determine the Effect of Price