Final answer:
Price elasticity of demand affects company pricing strategies; lower prices if the elasticity is above 1 and raise prices if below 1 to maximize revenue. Gasoline price elasticity impacts operational costs for logistics companies. The income elasticity of demand for products like bread determines if they are normal or inferior goods.
Step-by-step explanation:
Understanding the concept of price elasticity of demand is crucial in making pricing decisions that affect a company's revenue. For instance, if a pharmaceutical company has a drug with a demand elasticity of 1.4 at current prices, it is advisable to lower the price to increase revenue, since the percent increase in quantity demanded will be greater than the percent decrease in price. Conversely, with an elasticity of 0.6, increasing the price is recommended, as the percent decrease in quantity demanded will be less than the percent increase in price, thereby increasing total revenue.
When the elasticity of demand is exactly 1, the company is advised to maintain the current price, as total revenue is maximized. For a practical example, consider companies like UPS or FedEx who would need to understand the gasoline price elasticity of supply. This would inform their decisions on how changes in gasoline prices could affect their costs and operations.
On the consumer side, the income elasticity of demand for products like bread can indicate whether it's a normal or inferior good. For example, if an increase in annual income results in a decrease in the quantity of bread consumed, bread would be considered an inferior good since consumption decreases as income increases.