Explain the total revenue test for elasticity (all three cases, including the unit elastic case)

Explain the total revenue test for elasticity (all three cases, including the unit elastic case)

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Expert Solution

Ans) Total revenue = Price × Quantity

A) Elastic demand ÷ demand is said to be elastic if change in quantity demanded is more than the change in price.

Total revenue will decrease if seller increases the price. It is because people can readily shift to another product or can hold demand.

Total revenue will increase if price decreases. It is because, it will attract more buyers and therefore, Q will increase, leading to increase in total revenue. Eg- sale i.e discount offered by shops.

That is price and total revenue has inverse relationship.

2) Inelastic demand ÷ inelastic demand is when change in quantity demanded is less than the change in price.

Total revenue will increase when price increases. It is because people cannot change their demand much.

Total revenue will decrease when price decreases.

That is, price and total revenue have direct relationship.

3) Unit elastic demand ÷ demand is said to be unit elastic when change in quantity demanded is equal to change in price.

Total revenue will remain unchanged with change in price.

Rahul Sunny answered 2 months ago

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