Making Price Elasticity A Useful Metric For Maximizing Profit

Abstract

An estimate of a product’s price elasticity can be used to calculate whether a price change will increase or decrease sales revenue. However, the price elasticity of demand does not indicate if a price change will increase or decrease gross profit because the marginal cost per unit confounds the calculation. However, an estimate of the price elasticity can be combined with the product’s markup to calculate if a change in the selling price will increase or decrease the profit. The purpose of this paper is to demonstrate how estimates of the price elasticity and the markup can be combined to help managers decide if greater profits can be realized with a price decrease or a price increase.