A local bakery notices that when they increase the price of their pastries, the total revenue initially rises, but after a certain point, it begins to fall. In this scenario, how can the bakery utilize its understanding of elasticity to make pricing decisions that maximize revenue?

The bakery can use the concept of elasticity to understand how changes in price affect the demand for their pastries. Elasticity measures how sensitive customers are to price changes; if a small price increase leads to a large drop in sales, demand is elastic. When the bakery raises prices and total revenue rises, it means demand is still somewhat inelastic, but if they raise prices too much and revenue starts to fall, it indicates that demand has become elastic. For example, if a pastry priced at $2 sells 100 units, bringing in $200, but increasing the price to $2. 50 causes sales to drop to 70 units, bringing in only $175, the bakery knows they have gone too far.