Question

Price elasticity of demand is an important concept. With appropriate examples, explain how this concept is related to total revenue. (Hint: When providing example, select a product whose demand may be relatively elastic; therefore, lowering its price may lead to increase in total revenue. This will allow other students to choose a different example.)

Answer 1

Price elasticity of demand measures the degree of responsiveness of percentage change in demand to the percentage change in price. Total revenue can be increased by lowering the price if the price elasticity is relatively elastic.

If the price elasticity of a good is relatively elastic for example goods such as furniture, electronics, automobiles, then the proportionate change in demand will be greater than the proportionate change in price. In this case, lowering the price of such goods will increase the total revenue as the consumer is more responsive to the price decrease and so they will demand more of such goods.