why does total revenue vary directly with price, if the demand is relatively price inelastic ?...

why does total revenue vary directly with price, if the demand is relatively price inelastic ? explain the relationships between elasticity , price and revenue

use your own words ( 200 words )

Expert Solution

Total revenue is price per unit times quantity sold.

Elasticity measures the responsiveness in quantity demanded with reference to the change in price. If demand is elastic, it means that the change in quantity demanded is more than the change in price. If price increases by 10%, the change in quantity demanded is 20%. If demand is inelastic it means that the change in quantity demanded is less than the change in price. If price changes by 20%, the quantity demanded will change by 5%. If the demand is unit elastic it means the change in quantity demanded is the same as the change in price. If price changes by 10%, the quantity demanded changes by 10%.

If the demand is inelastic, revenue will increase if the price increases. Revenue will decrease if the price falls. This is because the change in price is more than the change in quantity demanded.

If demand is elastic then an increase in price will lead to a fall in revenue because the quantity demanded will fall by a greater amount. If prices are decreased and the demand is elastic, revenue will increase. Unit elasticity means the change in revenue is the same as change in price, whether price increases or decreases.

Rahul Sunny answered 1 year ago

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