Question

Which of the following is correct? If the demand for a product is inelastic, a change in price will cause total revenue to change in the opposite direction. If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction. If the demand for a product is inelastic, a change in price may cause total revenue to change in either the opposite or the same direction. The price elasticity coefficient applies to demand, but not to supply.

Answer 1

If the demand for a product is inelastic , then a change in price will cause total revenue to change in the same direction.

Elasticity of demand inelastic means demand indicate price insensitivity. It means percentage change in price leads lo lower percentage change in quantity demand. For example if price chages are 20%, then quantity change will be less than 20%,let suppose it is 10%. So if price changes 20% quantity changes suppose 10%. Now in this case of inelastic demand for a product if price rises quantity fall will not be that percentage. So overall there will be rise in revenue with rise in price. It showing same direction of price change and total revenue change.

Similarly if price falls then quantity will not rise in that percentage , so overall there will be fall in revenue. So we can fall in price leads to fall in revenue. So price is falling revenue is falling and it is also showing same direction of price change and revenue change. Both are falling.

For example we can say p=100 ,q=100 and TR=100*100 = 10000. Now if p changes 20% and quantity changes 10%. In case of rise in price new price will be 120 and new quantity will be 90. So toal revenue will be 120*90=10800, (10800>10000). So price rises revenue rises. Now in case of fall in price, new price will be 80, and new quantity will be 110. So Total revenue will be 80*110 = 8800, (8800<10000). So fall in price leads to fall in revenue.