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...Price elasticity of demand affects a business's ability to increase the price of a product. Elastic goods are more sensitive to increases in price, while inelastic goods are less sensitive. Assuming that there are no costs in producing the product, businesses would simply increase the price of a product until demand falls. Things become more complicated, however, after introducing costs. Let's say that the cost of vanilla flavoring increases as a result of short market supply. As profits equal revenue minus costs, this would lower the ice cream shop's profits. If costs were close to the price of vanilla ice cream, profits would be almost zero. As vanilla ice cream is elastic, the shop manager would be unable to increase the price without damaging demand. Some businesses, therefore, sell some goods that have little to no profit margin. Their main profits come from products in higher demand. In this case, the ice cream shop would increase the price of the more inelastic good, chocolate ice cream, in order to compensate for the loss in profits.
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