Why Is the Concept of Price Elasticity of Demand of Interest to the Owner of a Retailer?

Why is the concept of price elasticity of demand of interest to the owner of a retailer?

Price elasticity of demand is a measure to show the responsiveness of the quantity of a good or services demanded by buyers when its price changes.  It can be defined as ratio of the percentage change in quantity of a product demanded to the percentage change in the price of the product (L.Brue, Stanley, R.McConnell, Campbell and M.Flynn, Sean, 2010).

The concept of price elasticity of demand of interest to the owner of retailer as it helps them to determine the price policy and thus increase their revenue.  This concept enables them to know how the changes of product price will affect the product’s sales.  As the price elasticity of demand of a selling product is high, buyers greatly response to the price changes since their acceptable price scope is low.  So, the business owners are able to handle on pricing structures and know which price points can create the largest profits for their business.  Thus, the prices of different products can be determined to increase sales (Suttle, 2015).  On the other hand, when the elasticity of demand of a selling product is low, consumers’ demand is relatively unresponsive to price changes.  Thus, the sellers can fix a higher price and sell slightly less of that product to earn greater revenue (Tuck, 2013).

In addition, for monopoly firm, the owner of retailer interests to the concept of price elasticity of demand as they can practice price discrimination in order to maximize business’s profit.  Price discrimination is the action of selling the similar product at different prices to different group of buyers.  There is a different price elasticity of demand for every class of buyers (Anon., 2015).  The firm is then charging a lower price for markets with high elasticity of demand, whereas a higher price will be charged for markets with low elasticity of demand.  By applying such a policy, the business can gain profits and thus earn more revenue to stabilize their business (Sethy, 2012).