Demand and Supply Factor Affecting Revenue Generation and Profitability

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What is the Elasticity of Demand?
* Price elasticity of demand describes how much a change in price will affect the level of demand for a certain product or service. If a certain good or service has high price elasticity, demand will tend to fall quickly if the price of the good or service increases and demand will increase quickly if the price of the good or service falls. On the other hand, for goods and services with low price elasticity, an increase in price will cause a relatively small drop in demand and a price cut will result in a relatively small increase in demand. Elasticity of Demand and Total Revenue

* The total revenue a business earns equals the total amount of goods and services sold times the price of those the goods and services. Price elasticity affects the total revenue in that it governs how much more or less revenue a business will make by changing the prices of products or services. For example, if a company currently sells 100 shirts a month at a price of $10, its total monthly revenue is $1,000. If it increases the price of shirts to $12, the company might still sell 95 shirts a month if the demand for shirts is relatively inelastic. At the new price level, the company earns $1,140 in total revenue a month. On the other hand, if consumers are very sensitive to the changes in the prices of shirts, the company might only sell 60 shirts a month at the $12 price. In this case, the company's total revenue would fall to $720 a month. By Gregory Hamel

September 22, 2011 Supply and demand may also affect how much a business can charge for a product or service. Low demand for a product or service could equal lower prices and determine whether a business is profitable. Conversely, high demand may increase the value of a product or service and cause business profits to increase. * Written By: Florence J. Tipton

* Edited By: John Allen
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