Price Elasticity of Demand, Advantage and Specialization in Economics

This essay delves into the crucial role of price elasticity of demand for producers, highlighting its impact on profit maximization through the understanding of demand and supply dynamics. It examines the importance of considering price elasticity when setting prices to achieve economic and allocative efficiency, minimize losses, and devise effective marketing strategies. Furthermore, the essay differentiates between comparative and absolute advantage, emphasizing the role of specialization and exchange in both concepts. It concludes by underscoring the significance of demand and supply laws in production, profit optimization, and the importance of specialization in trade, offering valuable insights into key economic principles for business applications. The essay also references relevant sources to support its arguments.

Running Head: ECONOMICS FOR BUSINESS
Economics
Name
Institution

Running Head: ECONOMICS FOR BUSINESS
Introduction
The essay revolves around price elasticity of demand knowledge and its importance to
producers. Price elasticity of demand is directly impacted to laws of demand and supply.
Further ,there’s need to understand the absolute advantage and comparative advantage economic
concepts .In addition, there’s need to explore the role of specialization and exchange concepts in
comparative and absolute advantage.
Concept of supply and demand
The concept of price elasticity of demand translates to the responsiveness of production to
changes in price. Predominantly, in cases of inelastic demand, price increases thus maximized
profits whereas elastic demand for goods and services results in decreased revenue .Regarding
supply ,the higher the price of a good the higher the quantity demanded hence increased revenue
for producers.
Reasons for considering price elasticity of demand when setting the price
According to the Demand laws, the higher the price of a commodity or service, the less
the quantity of commodity or service will be consumed hence it is important for producers to
consider price elasticity of demand to enable them meet their target as producers through fixation
of optimum price levels(Hayes,2017).Additionally, through price elasticity of demand ,producers
are able to be economically and allocative efficient in the sense that production is based on the
market conditions at the time hence no wastage of quantity produced.
Moreover, through the price elasticity of demand, producers are able to maximize profits in
the sense that when the price of goods and services is high ,there’s equally increased
production(Quantity supplied)thus increased revenue for the

Running Head: ECONOMICS FOR BUSINESS
producers(Hayes,2017)Further ,price elasticity of demand helps the producers incur less or avoid
losses in the sense that when the price of goods is elastic, producers are able to produce less
goods to avoid wastage which would otherwise be incurred without proper market information.
Also, marketing strategies are best devised with proper knowledge in price elasticity of demand
that is because goods with high elasticity of demand require more marketing strategies cost as
compared to goods with low elasticity of demand(Guo,2017).
Difference between comparative advantage and Absolute advantage
Specialization refers to production of goods and services best suited to a producer.
Noteworthy, the principle of absolute advantage is based on absolute advantage theory which
stipulates that production of greater and better quantity of goods using the same resources
available to competitors whereas comparative advantage is based on comparative advantage
theory which implies lower opportunity in the production of goods than competitors. Typically,
specialization isn’t vital for comparative advantage but vital for absolute advantage. Whereas
comparative advantage is based on opportunity cost, absolute advantage is based on superior
capabilities and cost. Additionally, comparative advantage promotes mutual benefits while
absolute benefits one party more than the other (Olivia, 2011) Comparative advantage is
considered the basis of trade. Absolute advantage deals with productivity. Further, comparative
advantage determines specialization (Boundless, 2017)
Conclusion.
This essay explores the importance of considering the price elasticity of demand of goods
and services from a producer’s point of view. Further, it looks at the differences between
comparative and absolute advantage from the standpoint of specialization andexchange
perspectives .All in all it can be said that laws of demand and supply play a crucial role in

Running Head: ECONOMICS FOR BUSINESS
production and profit maximization .Lastly, specialization is key for comparative advantage in
trade.

Running Head: ECONOMICS FOR BUSINESS
References
Boundless.(2017)Absolute Advantage vs Comparative Advantage.Boundless.Retrieved from
https://www.boundless.com/economics/textbooks/bou
ndless-economics-textbook/international-trade-31/
introduction-to-international-trade-124/absolute-
advantage-versus-comparative-advantage-493-12589/
Guo, V.(2017)Price Elasticity 101:The Necessity and your pricing strategy. Price
Intelligently. Retrieved from
http://www.priceintelligently.com/blog/bid/154374/pri
ce-elasticity-101-the-necessities-and-your-pricing-
strategy
Hayes, A. (2017) Economics Basics: Supply and Demand .Investopedia. Retrieved from
http://www.investopedia.com/university/economics/ec
onomics3.asp
Olivia. (2011) Difference between absolute and comparative Advantage. Difference Between.
Retrieved from
http://www.differencebetween.com/difference-
between-absolute-and-vs-comparative-advantage/