Question

1. (a) Provide the formula for calculating Price Elasticity of Demand.

(b) Explain each variable in the formula you provided above.

2. Explain how the formula is used to make decisions regarding increasing revenue

Answer 1

1 (a) The formula for the calculation of price elasticity of demand is given as :-

P.E.D = %Q ÷ %P.

2 (b) In the above equation the formula of price elasticity of demand.

Price elasticity of demand can defined as the percentage change in the quantity demanded of any good or a service when it's price changes.

Therefore in the above equation, Q is the change in the quantity demanded of a good or a service while P is the change in the price of that good or service.

2. The price elasticity of demand can be used as an indicator to determine the total revenues earned by a firm.

If any Increase in the price of a good causes the total revenue to rise, then that good is said to have an inelastic demand as the consumer will be willing to buy the good regardless of any change in the price.

This means that change in quantity demanded will remain the same even when the price of a good rises when the demand is inelastic which causes the total revenue to increase.

If any Increase in the price of a good causes the total revenue to fall, then that good is said to have an elastic demand as the consumer will be less willing to purchase that good when it's price increases.

This means that the quantity demanded changes with the changes in price when the demand is elastic which causes the total revenue to fall.