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In: Economics

What happens to total revenue given a price increase and demand is inelastic? Why?

What happens to total revenue given a price increase and demand is inelastic? Why?

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Expert Solution

Price elasticity of demand(E) is defined as the ratio of percentage change in quantity demanded to the percentage change in the price of same quantity.So,if demand is inelastic,that means E<1(for relatively inelastic) and E=0(for perfectly inelastic). Inelasticity of demand simply means change in percentage of quantity demanded is less than percentage change in price of the same quantity.

Now,if price is increasing,and demand is inelastic so percentage change in price will be more than the percentage change in quantity demanded,which means price is increasing at a faster rate for each change in demand,so this will lead to increase in total revenue as total revenue is the product of price of a commodity and quantity demanded (same commodity).

, here % is percentage change in quantity demanded of a commodity and % is percentage change in price of the same quantity.

Rahul Sunny answered 1 year ago
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