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Firms strive to maximise sales revenue, which in turn determine profit outcomes. The analysis of price...

Firms strive to maximise sales revenue, which in turn determine profit outcomes. The analysis of price elasticities can assist firms in maximising their total revenues.” With regards to the above statement, discuss the impact of the different categories of price elasticity of demand on total revenue.(10)

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Answer #1

Elasticity Price Total Revenue

Elastic Rises Decreases

Falls Increases

Unit Elastic   Increase/decrease No Change

Inelastic Rises Increases

Falls Decreases

The image above shows the relationship between elasticity and Total Revenue curve .

When demand is elastic , little change in price causes huge change in quantity demanded so revenue is affected oppositely . In case of unit elastic there cannot be any change in revenue since change in demand is proportionate to price . But in case of inelastic demand , a price change actually does not change demand to a great extent , so firms can make profits here by increasing price .

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