Question

QUESTION 4

An economist needs a deep understanding of price elasticity concepts and their applicability in today’s economy.

4.1 Define price elasticity of demand and how it is measured.

4.2 Explain the FIVE (5) categories of price elasticity of demand.

4.3 Explain the relationship between the total revenue from the sales of a product and the price elasticity of

the demand for the product.

Answer 1

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Question:

Answer:

4.1). Answer:

Price Elasticity of Demand = Price elasticity of demand is a economic measure of the percentage change in quantity demand relation to percentage change in quantity demand .

Price Elasticity of Demand = Percentage Change in Quantity Demand /Percentage Change in Quantity Demand

4.2). Answer:

Five categories of price elasticity of demand are following as-

a). Perfect Elastic Demand: when a little or small change in price result in major change in quantity demand. Here elasticity of demand is greater than 1.

b). Perfect Inelastic Demand: When quantity in demand is stable and not affected by price change. Here elasticity of demand is equal to 0.

c). Relatively Elastic Demand: When the % change in quantity in demand is little more than % change in price. Here elasticity of demand is less than 1.

d). Relatively Inelastic Demand: When the % change in quantity in demand is less than % change in price. Here elasticity of demand is less than 1.

e). Unitary Elastic Demand: When the % change in quantity in demand is equal to % change in price. Here elasticity of demand =1.

4.3). Answer:

Relationship between the total revenue from the sales of a product and the price elasticity of the demand for the product.

The revenue depends upon the demand or sales of total number of units on a specific price. Or we can say that Revenue = Total number of units sale * price.

We have say that there are five category of elasticity of demand and in every category relation between price and total quantity of demand is different. Here we will understand the relationship between the total revenue from the sales of a product and the price elasticity of the demand for the product separately for every category.

In category 'a' (Perfect Elastic Demand) where, elasticity of demand is greater than 1 so, if a firm decreases the price level then the firm will sale more units and raise revenue level because here, a little or small change in price result in major change in quantity demand and vice-versa.

in category 'b' (Perfect Inelastic Demand) where, elasticity of demand is equal to 0.So, here a firm can earn more profit to increase the price level because quantity in demand is stable and does not not affected by the price change.

In category 'c' (Relatively Elastic Demand) a company can generate more revenue through the price change(decrease) and vice versa because here the % change in quantity in demand is little more than % change in price.

In category 'd' here, Company can not generate a positive revenue in case of raising the price level and vice-versa because the % change in quantity in demand is less than % change in price. Here elasticity of demand is less than 1.

In category 'f' here, company can raise revenue through increasing the price level because the % change in quantity in demand is equal to % change in price. Here elasticity of demand =1.

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