Explain the relationship between elasticity and total revenue for all three categories of elasticity

Expert Solution

There are three categories of elasticity:-

Elastic demand - higher prices decreases the demand for a good and vice versa.
Inelastic demand - higher prices will not cause any significant changes to the demand for a good.
Unitary elastic demand - demand changes proportionally equals the changes in the price.

The relationship between these three categories with total revenue are given below :-

Elastic demand :- Goods with elastic demand have negative relationship with the total revenue. That is, when the price of a good increases, the demand decreases. This will cause the total revenue to fall.
Inelastic demand :- Goods with inelastic demand will have positive or direct relationship with the total revenue. That is, when the price of a good increases, the demand remains the same. This will cause the total revenue to rise.
Unitary elastic demand :- For a good with unitary elastic demand, the total revenue has a constant relationship with the price. That is, it remains the same when the price rises or falls.

Rahul Sunny answered 3 months ago

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