Final answer:
Price elasticity is the ratio of percentage change in volume to percentage change in price, which guides strategic pricing decisions to maximize revenue based on elasticity values of greater than, less than, or equal to 1.
Step-by-step explanation:
The ratio of the percentage change in volume to the percentage change in price is known as price elasticity of demand or supply. In the context of demand, the price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. For example, if the elasticity is 1.4, it indicates that a decrease in price will result in a proportionally greater increase in the quantity demanded, thereby advising a company to lower its price to increase total revenue. Conversely, if the elasticity is 0.6, an increase in price will lead to a decrease in quantity demanded but will increase total revenue because the price increase outweighs the decrease in volume sold. If elasticity is exactly 1, it suggests that the total revenue is maximized and no price change is advised.