Elastic and inelastic demand, Microeconomics

Elastic and Inelastic Demand can be understood as follows:

Slope and elasticity of demand have an inverse relationship between them. When slope is high elasticity of demand becomes low and vice versa.

When the slope of the demand curve is infinity, elasticity becomes zero (perfectly inelastic demand); and when slope of the demand curve is zero, elasticity becomes infinite (perfectly elastic demand). Unit elasticity means that a 1% change in cost will result in an exact 1% change in quantity demanded. Hence elasticity will be equal to one. A unit elastic demand curve plots a rectangular hyperbola. Note that the straight line demand curve cannot have unit elasticity as the value of elasticity changes along with the straight line demand curve.

Total revenue and Elasticity can be described as follows:

The Total revenue (TR) = Price x Quantity; when the demand curve becomes inelastic, TR increases as the cost goes up, and vice versa; when the demand curve becomes elastic, TR falls as the price increases, and vice versa.

 

Posted Date: 7/19/2012 4:05:52 AM | Location : United States







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