Identify, explain and illustrate the role of elasticity of demand in the theory of the firm.

The theory of the firm classifies markets for economic goods/services broadly into perfectively competitive markets (price taking firms) and pure monopoly, monopolistic competition and oligopoly (price searching firms). The economic theory of the firm assumes that the firms primary objective is to profit maximise, (the level of output where the gap between its total revenue and its total cost is greatest). Where a firm is unable to make a profit at any level of output, then it will set that level of output where its loss is the minimum possible. In many respects, the most important determinant of a firms¡¯ profitability is the demand for its product. Hence firms must have clear information about the demand for their products/services to make effective short-run and long-run decisions. For example, in order to establish effective price policy, management must know, the effect, that a change in price will have on the quantity demanded, and its revenue.
Also a good estimate of the se...