3. Define three types of elasticity of demand. Indicate how you would use information from recent...

3. Define three types of elasticity of demand. Indicate how you would use information from recent research paid by your company that the own price elasticity of your product is -1.2 and not -0.8 as previously thought.

Expert Solution

Elasticity of demand measures the responsiveness of quantity demanded to a given change in price. The higher (lower) the responsiveness, the more elastic (inelastic) demand is. It is defined as

Elasticity (Ed) = % Change in quantity demanded / % Change in price

The three types of elasticity are:

(i) When Absolute value of Ed is higher than 1, demand is elastic

(ii) When Absolute value of Ed is lower than 1, demand is inelastic, and

(iii) When Absolute value of Ed is equal to 1, demand is unit elastic.

If previously, elasticity was found to be as -0.8, it meant demand was inelastic, and for inelastic demand, a rise (fall) in price will lead to an increase (decrease) in total revenue. But as new research finds elasticity is -1.2, it means demand is elastic, and for elastic demand, a rise (fall) in price will lead to a decrease (increase) in total revenue. Therefore, in order to raise revenue with new information, price should be decreased.

Rahul Sunny answered 2 years ago

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