Let’s Stretch: Elasticity of Demand
Anyone who has set foot in a discount store knows that some sellers try to increase the quantity of goods they sell by lowering their prices. From what we saw about supply and demand, that should work. However, in reality, it may or it may not. Moreover, the seller may or may not bring in more money even if he does sell more goods at the lower price.
If a seller reduces his prices, will demand always increase? (Hint: never say “always” in economics.) The more important question is, “How much should he reduce his prices?” In other words, how much will demand rise in response to a price reduction?
The answers to these questions depend on the buyer’s situation and his need or desire for the product, as well ...