Explain price elasticity and total revenue, Managerial Economics

Assignment Help:

Q. Explain Price elasticity and total revenue?

Given the relationship between price elasticity and marginal revenue of demand in Eq. II, the decision-makers can simply know whether or not it is advantageous to change the price. Given Eq. II, if e = 1, MR = 0. Thus, change in price won't cause any change in TR. If e < 1, MR < 0 and, therefore TR decreases when price decreases and TR increases when price increases. And if e > 1, MR > 0, then TR increases if price decreases and TR increases when price increases.

Effect of change in price on TR for different price-elasticity co-efficient is summarised in the table mentioned below:

Table: Elasticity, Price change and change in TR

Elasticity Demand

Nature of Price

Change in TR

Change in co-

efficient

ep = 0

Perfectly inelastic

Increase 

Decrease

Increases 

Decreases

ep< 1

Inelastic

Increase 

Decrease

Increases 

Decreases

ep = 1

Unitary elastic

Increase 

Decrease

No change in TR

ep> 1

Elastic

Increase 

Decrease

Decrease 

Increases

ep = ∞

Infinitely elastic

Increase 

Decrease

Decrease to zero

Increase infinitely

As the table illustrates, when e = 0, the demand is said to be perfectly inelastic. Perfect inelasticity of demand implies no change in quantity demanded when price is changed. So, a rise in price will increase the total revenue and vice versa. In the case of an inelastic demand (which means, e < I), quantity demanded increases less than the proportionate decrease in price and henceforth the total revenue falls when price falls. Total revenue increases when price increases since quantity demanded decreases less than proportionately. If demand for a product is unit-elastic (e = 1) quantity demanded increases (or decreases) in the proportion of decrease (or increase) in the price. Then, the total revenue remains unaffected. If demand for a commodity has e > 1, change in quantity demanded is greater than proportionate change in price. Consequently, the total revenue increases when price falls and vice versa. The case of an infinitely elastic demand is rare. Such a demand line basically implies that a consumer has the opportunity of buying any quantity of a commodity and seller can sell any quantity of commodity, at a given price: it's the case of a commodity being bought and sold in a perfectly competitive market.


Related Discussions:- Explain price elasticity and total revenue

Marginal damage curve , Consider a model world which is subject to a risk o...

Consider a model world which is subject to a risk of global climate change. The damage is known to be from greenhouse gas (GHG) emissions as indicated by the marginal damage curve

Monopolistic competition, Evaluate critically chamberlin''s model of monopo...

Evaluate critically chamberlin''s model of monopolistic copetition

Full-service department, Like supermarkets, full-service department stores ...

Like supermarkets, full-service department stores like Macy's are mainly in decline. What factors may these types of stores have in common behind their declines? How would you veri

Explain systematic failures of government, Question 1: (a) How do econ...

Question 1: (a) How do economists go about studying the economics of the public sector? Describe the four stages of analysis. (b) What are the main reasons explaining syst

Exceptional supply curves, Exceptional supply curves In have some situ...

Exceptional supply curves In have some situations the slope of the supply curve may be reversed.   i)   Regressive Supply.   In this case, the higher the price within a ce

Features of mixed economy, Features of this system The mixed economy i...

Features of this system The mixed economy includes elements of both market and planned economies.  The government operates and controls the public sector, which typically cons

What is decreasing marginal cost, What is decreasing marginal cost? All...

What is decreasing marginal cost? All additional lawn mowed generates less benefit than the earlier lawn à along with decreasing marginal benefit; every additional unit generat

Central bank functions-controller of credit, Controller of Credit The p...

Controller of Credit The principles of credit control by the central bank were discovered and enunciated after the publication of Bagehot Lombard street in 1873. Even after 187

Phillips curve, PHILLIPS CURVE   The Phillips  curve,  named  after  A....

PHILLIPS CURVE   The Phillips  curve,  named  after  A.  W.  Phillips,  describes  the  relationship between unemployment  and  inflation. In  1958  Phillips, then  professor a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd