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Chapter 19: 19.2 Learning objectives (page 416)

Explain the relationship between price elasticity of demand and total revenues

Short Answer

Expert verified

The relationship between price elasticity of demand and total revenues is explained

Step by step solution

01

Introduction 

The ratio of the percentage change in quantity demanded of a product to the percentage change in price is known as price elasticity of demand.

Total revenue is the total amount of all goods and services sold.

02

Relationship between price elasticity of demand and total revenue

When the price rises, the quantity decreases. The original price and quantity, as well as the slope of the demand curve, determine whether overall revenue will increase or decrease.

If the percentage increase in quantity is greater than the % decrease in price, overall revenue will grow as a result of the increase in quantity.

A product's elastic or inelastic demand is determined by the percentage change in price and quantity.

03

General rules for the relationship of price elasticity of demand and total revenue

1. When demand is inelastic (price elasticity 1), price and total revenue have a positive relationship, which means that as price rises, total revenue rises as well.

2. When demand is elastic (price elasticity >1), price and total revenue have a negative relationship, meaning that price rises lead to lower total revenue.

3. When demand is unit elastic (price elasticity =1), price changes have no effect on total revenue. When the demand elasticity is 1, the total revenue is maximized.

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Most popular questions from this chapter

Suppose that over a range of prices, the price elasticity of demand varies from 15.0 to 2.5. Over another range of prices, the price elasticity of demand varies from 1.5 to 0.75. What can you say about total revenues and the total revenue curve over these two ranges of the demand curve as price falls?

Consider Figure 19-2. Work out the calculation for the price elasticity of demand between prices of \( 1 per reservation and \)2 per reservation to prove that the value is 0.158.

Suppose that the cross price elasticity of demand between eggs and bacon is -0.5. What would you expect to happen to purchases of bacon if the price of eggs rises by 10 percent?

The value of cross price elasticity of demand between goods Xand Yis 1.25, while the cross price elasticity of demand between goods Xand Zis -2.0. Characterize Xand Yand Xand Zas substitutes or complements.

What do you suppose were the likely short-run adjustments to the removal of the cotton subsidy by Egyptian farmers who continued to devote all of their lands to agricultural crops?
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