Question

What do you learn about the relation between revenue-maximizing prices and elasticity? (50words)

Answer 1

The elasticity of demand shows how quantity demanded changes as the price changes. In case demand is price inelastic then an increase in prices will bring about an increase in total revenue. On the other hand if demand is price elastic then an increase in price will cause a fall in total revenue. If demand is price elastic then a decrease in price will cause an increase in total revenue. As we move downwards along the demand curve the elasticity increases. So in case of commodities which are essential goods the demand for the good is inelastic and so price must be increased in order to increase total revenue. For goods like televisions, demand is price elastic and so a decrease in price will increase total revenue.