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Price Elasticity and Pricing Strategy, Target Costing

How does the price elasticity of demand impact a company's pricing strategy?

How can companies apply the target costing approach? Provide an example.

Solution Preview

The price elasticity of demand can significantly impact a company's pricing strategy by serving to either allow the company to basically charge whatever it wants or can or by limiting them to a certain price range. For example, gasoline has a significant amount of price elasticity. The price can fluctuate $1 to $2 per gallon and demand barely changes. Only after the price increases or decreases, for example, $3 per gallon does demand change significantly. With competitive gasoline companies buying their raw materials (oil) from similar producers, the companies can, as long as competitors all do the same, charge a higher price than would be able under more competitive circumstances or in a situation where limited ...

Solution Summary

The solution describes the impact of price elasticity upon pricing strategy and also describes how a firm can use the target costing approach.