Economics Elasticity Of Demand Questions
The price elasticity of demand affects total revenue by determining the responsiveness of quantity demanded to changes in price. If the demand for a product is elastic (elasticity greater than 1), a decrease in price will lead to a proportionally larger increase in quantity demanded, resulting in an increase in total revenue. Conversely, an increase in price will lead to a proportionally larger decrease in quantity demanded, resulting in a decrease in total revenue.
On the other hand, if the demand for a product is inelastic (elasticity less than 1), a decrease in price will lead to a proportionally smaller increase in quantity demanded, resulting in a decrease in total revenue. Similarly, an increase in price will lead to a proportionally smaller decrease in quantity demanded, resulting in an increase in total revenue.
In summary, when demand is elastic, changes in price have a larger impact on total revenue, while inelastic demand leads to smaller changes in total revenue in response to price changes.