How does price elasticity of demand affect pricing strategy?

• A. If demand is elastic, small price changes cause large changes in quantity demanded.
• B. If demand is elastic, price changes have no effect on total revenue.
• C. If demand is inelastic, small price changes produce large changes in quantity demanded.
• D. If demand is inelastic, price changes cause large swings in quantity demanded.

Answer: (A)

Price elasticity of demand measures how strongly buyers respond to price changes. When demand is elastic, the quantity demanded is highly responsive, so a small price change leads to a relatively large change in how much people buy. This matters for pricing strategy because lowering price tends to increase total revenue if demand is elastic—the gain in sold units outweighs the lower price. Conversely, raising price would tend to reduce revenue due to the larger drop in quantity.

The correct idea is that small price changes produce large changes in quantity demanded when demand is elastic. The other statements aren’t accurate: elastic demand does affect total revenue with price moves, inelastic demand means quantity responds only slightly to price changes, and price changes don’t cause large swings in quantity when demand is inelastic.