What Affects Elasticity of Demand?
The decision to cut prices to increase total revenue has to be driven by the demand for the product. Obviously, no company officials would ever consider cutting prices if their product is in high demand and their customers are showing no resistance to the established price. If, on the other hand, the customer can find another, similar product at a lower price and chooses to buy the less expensive product, the manufacturer of the more expensive item faces a decrease in sales and a consequent drop in total revenue. If other items that a customer has to pay for suddenly increase in price, the customer has less disposable income to spend, and demand for some items that are not considered necessities will drop. If the customer has a long period to get used to increased prices, the customer will find substitutes for more expensive purchases and demand will drop at a greater rate than if price hikes came on suddenly.
