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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

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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

The diagram below depicts the demand curve for "miniburgers" in a nationwide fast-food market. Use the information in this diagram to answer the questions that follow.

Quantity (mini burgers per day)

a. What is the price elasticity of demand along with the range of the demand curve between a price of \(0.20per miniburger and a price of role="math" localid="1651796932841" \)0.40per miniburger? Is demand elastic or inelastic over this range?

b. What is the price elasticity of demand along with the range of the demand curve between a price of \(0.80 per miniburger and a price of \)1.20 per miniburger? Is demand elastic or inelastic over this range?

c. What is the price elasticity of demand along with the range of the demand curve between a price of \(1.60 per miniburger and a price of \)1.80 per m ? Is demand elastic or inelastic over this range?

A 5percent increase in the price of digital apps reduces the amount of tablet devices demanded by 3percent. What is the cross price elasticity of demand? Are tablet devices and digital apps complements or substitutes ?

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?

Why does if make sense that there was a negative percentage change in the quantity of cable TV subscriptions demanded in response to an increase in the price of these subscriptions?

An individual's income rises from \(80,000per year to \)84,000per year, and as a consequence the person's purchases of movie downloads rise from 48per year to 72per year. What is this individual's income elasticity of demand? Are movie downloads a normal or inferior good? (Hint: You may want to refer to the discussion of normal and inferior goods in Chapter 3.)
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