Elasticity is related to a firm's total revenue and changes as you move up and down the demand curve. Suppose you are a marketing manager charged with deciding whether to increase the price of goods. The company's goal in considering that decision is to increase total revenue. If you were facing elastic demand, would a price increase be a good way to increase total revenue? If you were facing inelastic demand, would a price increase be a good way to increase total revenue? Since elasticity changes as you move up and down the demand curve, how can the marketing manager know whether demand for a product is elastic or inelastic?
When demand is elastic, a N% increase in price will decrease quantity demanded by more than N%, so total revenue will decrease. Increasing price is no a good way to increase revenue.
When demand is inelastic, a N% increase in price will decrease quantity demanded by less than N%, so total revenue will increase. Increasing price is a good way to increase revenue.
If an increase in price decreases (increases) total revenue, it means demand is elastic (inelastic), and if a decrease in price increases (decreases) total revenue, it means demand is elastic (inelastic).
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