Is price increase the correct decision to raise revenue?substainate ur answer using price elasticity of demand and income elasticity concepts
You may wish to read your text materials to understand these concepts. You can find more here:
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But I do not know how Ur would answer this question. I believe that was an ancient city in the eastern Mediterranean region.
To determine whether a price increase is the correct decision to raise revenue, we can analyze the concepts of price elasticity of demand and income elasticity.
1. Price Elasticity of Demand: Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It indicates how sensitive consumers are to changes in price. The formula for price elasticity of demand is:
Price elasticity of demand = (% change in quantity demanded) / (% change in price)
- If the price elasticity of demand is elastic (>1), it means that consumers are highly responsive to price changes. In this case, a price increase would lead to a significant decrease in quantity demanded, potentially resulting in lower revenue.
- If the price elasticity of demand is inelastic (<1), it means that consumers are less responsive to price changes. Here, a price increase would lead to a relatively smaller decrease in quantity demanded, potentially resulting in increased revenue.
2. Income Elasticity: Income elasticity measures the responsiveness of the quantity demanded to changes in income. It helps to understand whether a good is a normal good (income elasticity > 0) or an inferior good (income elasticity < 0). The formula for income elasticity is:
Income elasticity = (% change in quantity demanded) / (% change in income)
- If the income elasticity of a product is positive, it indicates that the good is a normal good. In this case, as income increases, the quantity demanded also increases. Therefore, a price increase might be a viable strategy to raise revenue.
- If the income elasticity of a product is negative, it suggests that the good is an inferior good. Here, as income increases, the quantity demanded decreases. In this scenario, a price increase might lead to lower revenue.
In conclusion, the decision to raise revenue through a price increase depends on the specific circumstances and the elasticity of demand. If the price elasticity of demand is inelastic and the income elasticity is positive, a price increase can potentially raise revenue. However, if the price elasticity of demand is elastic or the income elasticity is negative, a price increase may lead to decreased revenue. Therefore, it is crucial to consider these elasticity concepts when making pricing decisions.