Question

Explain why TR reacts differently to a price change depending on the type of elasticity of demand you have. (Why ... not just what the reaction is ...)

Answer 1

When demand is inelastic. In this case , percentage change in quantity demanded is smaller than the percentage change in price. Therefore, as price decreases , quantity increases by smaller amount , which results in decrease in total revenue. And as price increases, quantity decreases by smaller amount but price increases by larger amount which results in increase in total revenue. Because here price has a larger impact on total revenue.

Similarly, in case of elastic demand. In this case ,percentage change in quantity demanded is larger than the percentage change in price. Therefore, as price decreases , quantity increases by larger amount , which results in increase in total revenue. And as price increases, quantity decreases by larger amount which results in decrease in total revenue. Because here quantity has a larger impact on total revenue.