Question

Define the price elasticity of demand and explain how total revenue is related to price elasticity.

Define the price elasticity of demand and explain how total revenue is related to price elasticity.

Homework Answers

Answer #1
  • Price elasticity of demand refers to the change in demand for a good or a service based on the changes in its price.
  • If the price elasticity of demand is relatively inelastic, then it means that the goods quantity demanded is less than the price.
  • Similarly, if the price elasticity of demand is elastic, then it means that the goods quantity demanded increases or decreases with decrease or increase in the price of that good.
  • The total revenue test helps in determining whether the demand of a good or service is elastic or inelastic.
  • If the increase in price leads to an increase in total revenue, then that good is said to be inelastic as its demand does not change with respect to the change in price.
  • Similarly, if the increase in price leads to a decrease in total revenue, then that good is said to be elastic as its demand changes with respect to the changes in price.
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