Explain the relationship between the price elasticity of demand and total revenue. What are the impacts of various forms of elasticities (elastic, inelastic, unit elastic, etc.) on business decisions and strategies to maximize profit? Explain your responses using empirical examples, formulas, and graphs for the various types of elasticities.
Is the price elasticity of demand or supply more elastic over a shorter or a longer period of time? Why? Give examples.
What are the impacts of government and market imperfections (failures) on the price elasticities of demand and supply?
Price Elasticity of Demand and Total Revenue: A Balancing Act
The price elasticity of demand (PED) measures how responsive the quantity demanded for a good or service is to a change in its price. It’s a crucial concept for businesses to understand when making pricing decisions that impact total revenue (TR), which is the product of price (P) and quantity demanded (Qd):
TR = P x Qd
Here’s how PED influences total revenue:
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Price Elasticity of Demand Graph:
Opens in a new window open.lib.umn.edu
Price Elasticity of Demand Graph with Xaxis: Price and Yaxis: Quantity Demanded
Business Decisions and Strategies:
Understanding PED allows businesses to make informed pricing decisions that maximize profit:
Examples:
Elasticity Over Time
Price elasticity of demand is generally more elastic in the long run than in the short run. This means consumers have more options to adjust their behavior in response to price changes over a longer period.
Example: If the price of coffee suddenly increases, people might still buy their usual brand in the short run due to lack of readily available alternatives. However, in the long run, they might switch to a cheaper brand, brew coffee at home, or cut back on their coffee consumption entirely.
Government and Market Imperfections
Government interventions and market failures can affect price elasticity:
Understanding how these factors influence price elasticities empowers businesses and policymakers to make informed decisions for optimal outcomes.