What happens to total revenue if price increases and demand is inelastic? Why?

If the demand for a product is inelastic, it means that the quantity demanded of that product does not change significantly in response to changes in the product's price. In this scenario, if the price of the product increases, the total revenue earned by the seller will also increase.

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Expert Solution

This is because, with inelastic demand, consumers will continue to purchase the product at a higher price, as they perceive it to have a high level of necessity or there are limited substitutes available. As a result, the quantity sold does not decrease significantly even with an increase in price. Therefore, the increase in price leads to an increase in total revenue earned by the seller.

For example, let's say a coffee shop sells a particular type of coffee that has an inelastic demand. If the shop increases the price of the coffee, say from $2.50 to $3.00, the demand for that coffee will not significantly decrease. Consumers who enjoy the taste and have a high need for caffeine may continue to purchase the coffee at the new higher price. As a result, the total revenue earned by the coffee shop will increase.

John Kimani answered 1 year ago

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