Brickley, Smith, & Zimmerman (2009), indicate that there are three main independent variables, including the price of the product, the prices of related products and the income of potential customers (p.107). In addition, it is indicated that the pricing of a product is important for two reasons when analyzing demand: “1) prices are among the most important variables that customers consider in making purchasing decisions, and 2) managers choose the price of their products. In light of the facts presented by Brickley, Smith, & Zimmerman, it is important that firms and their managers assess what impact a price change may have. As Brickley, Smith, & Zimmerman (2009) present, “demand curves generally slope downward” (p.109). This means, as prices increase, demand decreases, and the other way around. Considering the law of demand, it is important that managers clearly understand what effect will a change in price have to the firms quantity demanded, which both represent the firm’s revenues.
One of the important factors that firm’s must thoroughly understand prior to a price change is the price elasticity of demand. This is the “percentage change in quantity demanded given a percentage change in its price” (Brickley, Smith, & Zimmerman, 2009, p.111). This is an important factor to thoroughly understand as a price increase or decrease can lead customers to not purchase the product at all, or if the price elasticity is zero, “quantity demanded is unaffected by price” (Brickley, Smith, & Zimmerman, 2009, p.112). Considering the importance of price elasticity, it is important that firms algo understand what are the determinants of price elasticity. Brickley, Smith, & Zimmerman (2009), indicate that typically, “elasticity of demand tends to be high when there are good substitutes for the product” (p.113). In addition, the elasticity will be dependent “on the importance of the