This might help:
The price elasticity of demand is important to business firms because they need to understand how much demand would change in response to changes in price, thus allowing it to decide on their optimal pricing policy. If demand was relatively elastic, the firm would know that lowering the price would expand the volume of sales, thus increasing total revenue. On the other hand, if demand was relatively inelastic, the firm could increase the price, which would also lead to an increase in total revenue, since the drop in sales would be less than proportionate. Awareness of the elasticity of demand in different price ranges is important for determining the best pricing policy for a firm and in deciding whether or not to change prices. To that extent, businesses often engage in statistical market research in order to determine consumer preferences and in particular, the price elasticity of the demand for thier product.
The government also needs to understand price elasticity of demand when pricing the goods and services that it provides for the community. Furthermore, it needs to be able to predict the effects of changes in the level of any indirect taxes. These taxes and charges raise the price of the goods affected and the government needs to be able to gauge the responsiveness of demand in order to accurately estimate the amount of revenue they will raise.
This relationship explains why governments tend to charge indirect taxes, such as excise duties, on those goods which have relatively inelastic demand, including alcohol, petrol and tobacco products. On the other hand, if the government were to impose an excise duty on a good for which demand is relatively price elastic, the increase in price caused by the tax would lead to a more than proportionate drop in sales. As a result, the increase in the tax may not raise revenue significantly.
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