Explain the relationship between the price elasticity of demand and total revenue. What are the impacts of various forms of elasticities (elastic, inelastic, unit elastic, etc.) on business decisions and strategies to maximize profit? Explain your responses using empirical examples, formulas, and graphs for the various types of elasticities.
- Is the price elasticity of demand or supply more elastic over a shorter or a longer period of time? Why? Give examples.
- What are the impacts of government and market imperfections (failures) on the price elasticities of demand and supply?
1. Relationship Between Price Elasticity of Demand and Total Revenue:
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. The relationship between PED and total revenue (TR) is crucial for businesses in determining optimal pricing strategies.
- Elastic Demand (PED > 1): When demand is elastic, a decrease in price leads to a proportionately larger increase in quantity demanded, resulting in higher total revenue. Conversely, an increase in price reduces quantity demanded, leading to lower total revenue. This is illustrated by the following formula:
TR=Price×Quantity\text{TR} = \text{Price} \times \text{Quantity}
- Inelastic Demand (PED < 1): With inelastic demand, a decrease…
1. Relationship Between Price Elasticity of Demand and Total Revenue:
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. The relationship between PED and total revenue (TR) is crucial for businesses in determining optimal pricing strategies.
- Elastic Demand (PED > 1): When demand is elastic, a decrease in price leads to a proportionately larger increase in quantity demanded, resulting in higher total revenue. Conversely, an increase in price reduces quantity demanded, leading to lower total revenue.
TR=Price×Quantity\text{TR} = \text{Price} \times \text{Quantity}
- Inelastic Demand (PED < 1): With inelastic demand, a decrease…
1. Relationship Between Price Elasticity of Demand and Total Revenue:
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. The relationship between PED and total revenue (TR) is crucial for businesses in determining optimal pricing strategies.
- Elastic Demand (PED > 1): When demand is elastic, a decrease in price leads to a proportionately larger increase in quantity demanded, resulting in higher total revenue. Conversely, an increase in price reduces quantity demanded, leading to lower total revenue. This is illustrated by the following formula:
TR=Price×Quantity\text{TR} = \text{Price} \times \text{Quantity}
- Inelastic Demand (PED < 1): With inelastic demand, a decrease…