5/1/2023 0 Comments Iunit elastic![]() Due to the law of demand, the sign will always be negative, so it is common to consider only the absolute value when analyzing the own price elasticity. Own price or demand elasticity measures the percentage change in quantity demanded divided by the percentage change in the price of the good. In this case, the total revenue would decline when the price is increased. Raising the price by two dollars decreases the quantity demanded by four units. ![]() If the price is $90, the quantity demanded is 20. Even though four units less are sold, the additional two dollars per unit sold increases the total revenue. If the current price is 10 dollars and the quantity demanded is 180, then a two dollar increase in the price reduces the quantity demanded by four units. Let’s assume that the demand for a given product can be represented by the equation, price = 100. We know from the law of demand, that as the price increases (decreases) the quantity demanded decreases (increases), but the question is by how much? Does total revenue increase or decease as we raise or lower the price? The answer is, as is often the case in economics, it all depends. One of the key decisions in business is determining what price to charge. ![]() We will focus on total revenue in this section and leave the discussion on costs for later. ![]() Total revenue is equal to the price each unit sells for times the quantity or number of units sold. Why do move theaters often have empty seats? Would they generate more revenue by lowering the price and selling more tickets? How responsive are movie goers to a change in the price? The answer to these questions are found using elasticities.Ī firm’s profit is determined by taking the total revenue minus the total cost. Section 01: Elasticity - Beyond Supply and Demand ![]()
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