What role does the price elasticity of demand play in markup pricing,

What role does the price elasticity of demand play in markup pricing, i.e., how does it affect the firm’s ability to mark up price over marginal cost?

What will be an ideal response?

ANSWER

The price elasticity of demand acts as a constraint on the firm’s ability to mark up price over the marginal costs of production. To be specific, the magnitude of the markup a firm can apply to marginal cost in setting price is inversely related to the price elasticity of demand for the item.