How can firms and governments use price elasticity of demand (PED) when making decisions?

Price
elasticity of demand refers to the amount that the demand for a product in the market will
change as the price of it is changed by its manufacturer. So, a product that is said to have a
highly elastic price will suffer little change in demand from the rise or fall of the price from
the manufacturer. Conversely, if demand falls sharply for a product when the price goes up or
increases significantly when the price goes down, the product is considered to have a highly
elastic demand.

Price elasticity of demand is important for governments and
companies to consider as they adjust prices for commodities in the market. If the demand for a
product is elastic, it might be a bad idea to raise the price much, although the right price cut
could significantly increase demand. On the other hand, if a company knows that the price of
something is highly elastic, they might feel free to raise it significantly.