When does a decrease in selling price lead to a greater than proportionate increase in sales?

A decrease in selling price leads to a greater than proportionate increase in sales when demand is classified as elastic. In this context, elastic demand refers to a situation where consumers are highly responsive to changes in price. Specifically, if the price of a product drops, consumers will significantly increase their quantity demanded because they find the product more attractive or affordable at the new price point.

For elastic demand, the percentage change in quantity demanded exceeds the percentage change in price. This means that if the selling price decreases by a certain percentage, the increase in quantity sold will be more significant than that percentage, driving greater overall revenue in the process.

In contrast, unitary elasticity reflects a situation where percentage changes in price and quantity demanded are equal, thus not leading to a greater increase in sales. Inelastic demand indicates that consumers are less responsive to price changes, meaning that a price decrease would only lead to a slight increase in sales. Therefore, in the case of elastic demand, businesses can strategically lower prices to stimulate a substantial uptick in sales, making this phenomenon particularly impactful in optimizing revenue and market share.