macroeconomics discussion please answer these question, Elasticity is therefore
ID: 1188707 • Letter: M
Question
macroeconomics discussion
please answer these question,
Elasticity is therefore not affected from the scale change. It is a scale free measure. What examples like this can you come up with? What is meant by inelastic, unitary elastic and elastic demand? What is the relationship between total revenue and elasticity? When demand is elastic, a decrease in price increases revenue. But when demand is inelastice a decrease in price decreases revenue. Explain how the mechanism at work between elasticity and total revenue. Hint use the law of demand of inverse relationship between price and quantity where when price decreases, quantity increases. Also remember that total revenue TR = P * Q. Thus when price decreases, quantity increases creating an offsetting effect on TR. Now the questions is. is the decrease in P greater, less or equal to the increase in Q? Once you find that out, you should be able to answer this question. What about when demand is inelastic? What is the other expression of the price elasticity of demand formula using percentage changes? Please discuss giving your own unique example. No two examples should be the same in class discussion. Going back to elasticity of demand, when would it pay for a company to decrease its price of the product to increase its total revenue? Would it be when demand is elastic or inelastic? When does it pay for a firm to increase its price with respect to the price elasticity of demand? When the firm is facing an elastic demand or inelastic demand? Here is a numerical question. If the slope of the demand curve is -1/2 and the price of the product is 2 and the corresponding quantity demanded at that price is 4. What is the price elasticity of demand? What if the price is 1 and quantity demanded is 6. Should the firm then, increase its price to increase revenue or decrease its price? What factors affect the elasticity of demand? Explain by use of examples.Explanation / Answer
Q2.
Elasticity of demand is also referred to as price elasticity of demand.
Price elasticity of demand of a good is the ratio of percentage change in quantity demanded of a good and percentage change in price of a good.
In other words, price elastcity of demand of a good is calculated by divivding percentage change in quantity demanded of a good by percentage change in price of a good.
When percentage change in quantity demand of a good is smaller than the percentage change in price of a good that brought it about, demand is said to be inelastic.
When percentage change in quantity demand of a good is equal to the percentage change in price of a good that brought it about, demand is said to be unitary elastic.
When percentage change in quantity demand of a good is greater than the percentage change in price of a good that brought it about, demand is said to be elastic.
Q3.
Relationship between Total Revenue and Elasticity
Each firm wants to earn maximum revenue. There are two ways in which firm can increase its total revenue either by increaing the price of good it sell or by selling more units at same price.
Elasticity of a good can be used to determine whether any increase in price will leads to increase in total revenue or not.
1. In case where demand for a good is inelastic, increase in its price leads to increase in total revenue.
2. In case where demand for good is elastic, increase in its price leads to decrease in total revenue.
Apart from this changes in total revenue due to increase in price can be used to determine whether demand for a good is elastic or not.
For instance, if any increase in price of a good leads to fall in its total revenue then in that case demand for commodity is said to be elastic.
On the other hand, if any increase in price of a good leads to rise in its total revenue then in that case demand for commodity is said to be inelastic.
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