Calculate
Price elasticity of demand and its relationship with total revenues
Explanation of Solution
Price elasticity of demand can be calculated with the analysis of change in demanded quantity when there is a change in price. When the quantity demanded for a unit change in price is more than a unit, we say it is relatively elastic. When the quantity demanded for a unit change in price is less than a unit, we say it is relatively elastic. When the quantity demanded for a unit change in price leads to a unit change in demand, we say it is unitary elastic.
To understand the relationship between elasticity and total revenue, we can analyze it with quantity effect and price effect.
If elastic: The quantity effect outweighs the price effect, meaning if we decrease prices, the revenue gained from the more units sold will outweigh the revenue lost from the decrease in price.
If inelastic: The price effect outweighs the quantity effect, meaning if we increase prices, the revenue gained from the higher price will outweigh the revenue lost from less units sold.
Concept Introduction:
Price Elasticity: It refers to responsiveness of demand to the change in price.
Total Revenue- It refers to the total income a firm receives from the sale of its output.
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Chapter 19 Solutions
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