Impact of demand elasticity on price and total revenue

When the price elasticity of demand for a good is elastic (|Ed| > 1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa (Picture a).

When the price elasticity of demand for a good is unit elastic (or unitary elastic) (|Ed| = 1), the percentage change in quantity is equal to that in price (Picture b)

When the price elasticity of demand for a good is inelastic (|Ed| < 1), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue of producers rises, and vice versa. (Picture c)

When the price elasticity of demand for a good is perfectly elastic (Ed is undefined), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue of producers falls to zero. The demand curve is a horizontal straight line.

When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good.

Action on the market
Price decrease
More expenditure	Expenditure constant	Less expenditure
Price increase
Less expenditure	Expenditure constant	More expenditure

Thisinformation is very useful in marketing researches. Produsers can understand the way of thinking their main purchasers through elasticity investigations. For there is special relationship between Price elasticity and Total revenue dynamics sellers can make their decidions about prises (increase or decrease) in order to increase profit.

Relationship between Price elasticity and Total revenue dynamics

Дата добавления: 2014-01-11