|Price elasticity of demand is important, in decision-making. It gives the measure of effect of price change in revenues. A given change in price leads to an increase or decrease or no change in total revenue. If the price elasticity accurately estimates, we can estimate accurately the new total revenue after price change.|
When demand for a company’s product is elastic, a price cut leads to an increase in total revenue. Its total revenue increase marginal revenue is positive. Because the proportionate rise in the quantity demand more than offsets, the proportionate fall in price. Similarly, when demand is price inelastic, a price cut leads a fall in total revenue. This means that marginal revenue is negative. The reason now is that the percentage increase in the quantity, demanded is not enough to neutralize the percentage fall in price. Finally, if demand for a company’s product is unitary elastic, total revenue remains constant whether price rises or falls. In this situation MR is zero. The reason is easy to find out the percentage change in the quantity demanded and the price are equal but opposite, so that they cancel each other out. These relations can be expanded with the help of diagram.