Relationship Between the Price Elasticity of Demand and Total Revenue

Price elasticity of demand is a Theory of the relationship between a change in the quantity demanded of a

The elasticity of demand measures the buyer’s reaction to price as its changing. “Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d, defined as E d = percentage change in quantity demanded of product X/ percentage change in price of product X” (McConnell, C. 2011). Therefore, Ed=∆Qd/∆Pd. When elasticity of demand is measured less than one, demand is considered to be inelastic. The coefficient in an inelastic range is less than one. When this takes place the percentage change in price is more than the percentage change in quantity. It can be said that when inelastic demand is present that quantity becomes less effected by price changing.

Law of Supply: Price and quantity has a direct relation, when price increases, quantity also increases. When the price of oranges increases, farmers

at total revenue and price elasticity of demand are closely related. (McConnell, Brue, Flynn, 2012)

The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the

Elasticity : rising or falling price lead changes in quantity of demand, and the quantity of supply and this so-called elasticity

This is important for the company to know the elasticity, because that can help it set the price. Where the price is elastic, the optimal price can be calculated based on how much it costs to manufacture the paint. The best use of this type of data is to find the optimal profit point.

If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity.

Because cotton is so popular, an increase in price does not automatically mean that there will be a decrease in the quantity demanded. Since the first choice for clothing is cotton, people will continue to purchase clothing and there will not be an effect on the supply demanded, even with a price increase. With essential commodities, price increases will not negatively affect the quantity demanded. Cotton has an inelastic demand because the quantity is not affected (Elastic and Inelastic Demand).

Elasticity is a measure of the responsiveness of demand to changes in the price of a good or service. In the case of Steam Scot, when the price rises from 4 to 5, demand falls from 60,000 to 40,000 units. The original equilibrium market price of 4 pounds resulted in demand of 60,000 units and this generated revenue of 240,000 pounds. When the prices increased to 5 pounds the resulting demand is 40,000 units, and this generates total revenue of 200,000 pounds. When market price changes from 4 pounds to 5 pounds 40,000 pounds of revenue are lost in this indicates an elastic price elasticity of demand.

When the elasticity of demand is elastic, the change in quantity will be greater that the change in price. Hence, the total revenue will reduce with increasing prices and increase as prices decrease. However, if the business offers goods or services with inelastic price elasticity of demand, then the change in quantity demanded will be smaller than the change in price. Consequently, the total revenue, which is a product of the two will increase when

* A product is inelastic if a big price change elicits very little influence on the quantity demanded.

The price elasticity is 1.19 which is just barely greater than 1, so therefore price is considered slightly elastic. In the short term, reducing price can lead to increased demands. However from a long term perspective, this is not sustainable. Decreased prices over time will lead to decreased revenue for the company. Over time this will negatively impact the business when revenue falls below zero and becomes inelastic.

When the price of a good rises the quality demanded falls, if we think about how much does it falls. To figure out by how much it falls we must calculate the price elasticity of demand which is calculate by how responsive demand is to rise in price. Also, the price elasticity of supply measures the responsiveness of quantity supplied to a change in price.

Recall that the elasticity of demand, which measures the responsiveness of demand to price, is given by