“Evaluate the view that the ability of firms to exploit their customers depends on the price elasticity of demand for their products" 25 marks Callum Barnett

Price elasticity of demand is the proportionate change in demand for a good, following an initial proportionate change in the good’s own price. Most goods are either elastic or inelastic. Elastic demand means that consumers are really sensitive to price changes. If the price goes down just a little, they'll buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for prices to return to normal. Inelastic demand is demand for a good or service that does not increase or decrease in response to changes in price. Demand for goods that are life necessities, such as water, or economic necessities, such as fuel, tends to be inelastic, since people cannot greatly change how much of these goods they consume, even if the price changes dramatically.
So when demand is elastic firms can’t exploit consumers as much as they are very sensitive to price, so if there is a slight increase in price in the product then demand will fall more significantly than the price rise meaning the firms would lose more customers and profits due to the decrease in demand as this diagram shows: http://www.darwinsmoney.com/wp-content/uploads/2011/01/elasticity-of-demand-300x225.jpgSo as you can see, let’s say a price of a good has increased from 18 to 20 that is an increase of just over 11%. Before this increase they were selling 20 of this good at the price of 18 but this 11% increase lead to a 50% reduction in quantity from 20 to 10, which is a significant drop compared to the small rise in price. This shows that it would be very hard to exploit consumers on an elastic good as you would have to reduce the price if you want to increase sales but that might reduce your total revenue as you’re selling at a lower