Business, 02.07.2020 18:01 jwyapo4

• explain the relationship between the price elasticity of demand and total revenue. What are the impacts of various forms of elasticities (elastic, inelastic, unit elastic, etc.) on business decisions and strategies to maximize profit? Explain your responses using empirical examples, formulas, and graphs.

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Answer from: adrian128383

If the price elasticity of demand is elastic, if the price decreases, total revenue will increase.

E.g. a product has a PED of 1.5, and 1,000 units are sold at $10 per unit, total revenue = $10,000.

If the price decreases by 10% to $9 per unit, the quantity demanded will increase to 1,150 units, and total revenue will increase to $10,350.

On the other hand, if the price elasticity of demand is inelastic, if the price increases, total revenue will increase.

E.g. the same product but with a PED of 0.5, and 1,000 units are sold at $10 per unit, total revenue = $10,000.

If the price increases by 10% to $11 per unit, the quantity demanded will decrease to 950 units, and total revenue will increase to $10,450.

A real world example that involves an extremely inelastic good is gasoline. Since gasoline has a very inelastic demand (between 0.02 - 0.04). That is why the quantity demanded barely changes if the price of gasoline since a steep increase in gasoline prices represents a larger expense per month.

The price of gasoline during 2008 was so high that it reached $4.11 per gallon, while today it costs on average $2.10 per gallon. That is a huge difference specially if we consider inflation and current dollars. As gasoline prices increase with a steady demand, the revenues of oil companies skyrocketed.

Answer from: Quest

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Answer from: Quest

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