determine how each of the following price change will affect the total revenues received by a seller. In other words, will they rise, fall or say the same?
a) price falls and demand is elastic
b) price rises and demand is inelastic
c) price rises and demand is elastic
d) price falls and demand is inelastic
e) price rises and demand is unitary
To determine how each of the following price changes will affect total revenues received by a seller, we need to understand the concept of price elasticity of demand.
a) Price falls and demand is elastic:
When the price falls and demand is elastic, it means that a decrease in price will cause a relatively larger increase in quantity demanded. As a result, the total revenues received by the seller will rise. This is because the increase in quantity demanded due to the lower price will outweigh the decrease in price, resulting in higher total revenues.
b) Price rises and demand is inelastic:
If the price rises and demand is inelastic, it implies that an increase in price will cause a relatively smaller decrease in quantity demanded. In this scenario, the total revenues received by the seller will also rise. Although the increase in price leads to a decrease in quantity demanded, the decrease in quantity is not large enough to offset the price increase, resulting in higher total revenues.
c) Price rises and demand is elastic:
When the price rises and demand is elastic, it means that an increase in price will cause a relatively larger decrease in quantity demanded. Consequently, the total revenues received by the seller will fall. The decrease in quantity demanded due to the higher price will outweigh the increase in price, resulting in lower total revenues.
d) Price falls and demand is inelastic:
If the price falls and demand is inelastic, it implies that a decrease in price will cause a relatively smaller increase in quantity demanded. Thus, the total revenues received by the seller will also fall. The increase in quantity demanded due to the lower price is not large enough to compensate for the decrease in price, resulting in lower total revenues.
e) Price rises and demand is unitary:
When the price rises and demand is unitary, it means that an increase in price will lead to an equal proportional decrease in quantity demanded. In this case, the total revenues received by the seller will remain the same. The decrease in quantity demanded due to the higher price perfectly offsets the increase in price, resulting in no change in total revenues.
Understanding the concept of price elasticity of demand helps in determining how changes in price impact total revenues. Elastic demand is more responsive to price changes, while inelastic demand is less responsive, and unitary demand implies a proportional relationship between price and quantity demanded.