Microeconomics elasticity and total revenue relationship

microeconomics elasticity and total revenue relationship

What you'll learn to do: explain the relationship between a firm's price elasticity of demand and total revenue. Price elasticity of demand describes how changes. Elasticities that are less than one indicate low responsiveness to price . about the relationship between the price elasticity of demand and revenue is TRUE? Suppose that, if the price of a good falls from $10 to $8, total expenditure on the. Knowing the price elasticity of their products is an important metric for marketers to under stand. An effective pricing strategy is necessary for a.

And now, let's go-- let's just do one more point actually for the sake of time.

Total revenue test

And I encourage you to try other ones. Try F on your own. My quantity is 16 burgers per hour. I sell a total of 32 burgers. Now actually, let's just do the last one, F, just to feel a sense of completion.

Total revenue and elasticity (video) | Khan Academy

I sell 18 burgers per hour. And once again, that's the area of this rectangle, this short and fat rectangle right over here. And E was the area-- the total revenue in E was the area of that right over there. And you could graph these just to get a sense of how total revenue actually changes with respect to price or quantity. Lets plot the total revenue with respect to quantity. So let's try it out. So if you-- let me plot it out.

So this is going to be total revenue. And this axis right over here is going to be quantity.

Elasticity and the Total Revenue Test- Micro 2.9

And we're going to, once again, go from-- let's see. And this is 20 right over here. And then total revenue. Let's see, it gets as high-- it gets pretty close to This is 10 20, 30, 40, and So that's 50, 40, 30, 20, and So when our quantity is 2, and our price is 9. Well, we don't have price on this axis right over here. But when our quantity is 2, our total revenues So it's going to be something like there. Then, when our quantity is 4, our total revenue is Then, when our quantity is 9, our total revenue is almost So right over there.

And then, when it's 11, it's also at that same point right over there. And then, when we are quantity is 16, our total revenues And then finally, when our quantity is 18, our total revenue is And what you see is that it's plotting out a curve that looks like this.

And if you remember some of your algebra 2, this is a concave downwards parabola right over here. And you can see there was actually some point at which you could maximize your total revenue. And if you really tried all the points here, you would see that maximum point is if you tried this point right over here, right at price 5 and quantity Now, the whole reason why I'm talk think about this. I could have talked about this independently of any discussion of elasticity just to see how total revenue relates to price and quantity at different points on the demand curve.

But there is an interesting relationship. In that very first video, and we actually used this exact demand curve for it. When we explored elasticity, we saw that up here at this part of the curve-- let me do this in a different color. At this point of the curve in orange for any change-- when you do a change in your price since the prices are pretty high, that is a much lower percent change in price than the impact that you get on quantity.

Because over here, although they look like they're close. Or I should say the absolute. For every 1 that down we move in price, we're moving 2 up quantity. But that 1 down in price is a very small percentage of price because our prices are high here. And it's a very large percentage of quantity right over here. So you get huge changes in percent quantity for very small changes in price in this part of the curve. So this part of the curve is elastic.

Or you could say that its price elasticity for demand is greater than 1. You get larger changes in percent quantity for a given change in percent price. Now, these parts of the curve down here, we saw is the opposite's happening.

microeconomics elasticity and total revenue relationship

You move 1 down, 1 unit down in price, you move 2 units to the right in quantity. But over here, price is a much lower. So this is a much larger percentage change in price. And this is a much smaller percentage change in quantity.

Total revenue test - Wikipedia

So you get large percentage changes in price for small percentage change in quantity. That means that here, you are relatively inelastic. And then right over here, right at this point, right in this region, right over here, we saw that we had unit-- we were unit elastic right over there. So there's an interesting relationship going on.

While we were, so while we were elastic, this part right over here, when we lowered price in this region. While we were elastic, when we lowered price, we got increases in revenue. So let me write this down. And this is generally, too, there's a couple of boundary cases on the math that make it a little bit, you can't make it absolutely true.

But while we are elastic, at the elastic points of our demand curve, a decrease in price. Total revenue was going up. You do a price cut on this part of the demand curve, you get more revenue. Then, when you are at unit elasticity, what was happening?

At unit elasticity, you were right at this point right over here. Moving Along the Demand Curve It's human nature. If the price of a product goes up, consumers buy less of it. If the price goes down, consumers buy more. In economic terms, that's called price elasticity. What if the price of gasoline goes up, the gas tank in your SUV is on empty, and you have to be at work in 20 minutes? Will you refuse to buy gasoline because the price is high?

microeconomics elasticity and total revenue relationship

You don't have any alternative, so you pay the higher price, buy the needed quantity of gasoline and go to your job. That's called price inelasticity. What Is Price Elasticity? Price elasticity measures the changes in demand for a product in reaction to changes in the price for that product. It's a ratio of percentages, and the formula is as follows: When the ratio is less than one, the demand for a product does not change substantially with changes in price.

Total revenue and elasticity

In this case, a company could increase its prices and not suffer a significant decline in sales volume. The elasticity is calculated as follows: The price for oatmeal goes up, and consumers buy less of the product.

They may start buying other cereal products, or they might switch to the grocery store's generic brand of oatmeal. Factors That Affect Elasticity The factors that affect the price elasticity of any product include: As in the case of rising prices for oatmeal, consumers can shift their purchases to similar products if they are readily available.

microeconomics elasticity and total revenue relationship

Coca-Cola and Pepsi are products that can be easily substituted for each other when prices change. This is an example of elastic demand.

If the alternatives are limited, the demand is less elastic.