What is the relationship between the price elasticity & the total revenue received by produces of a commodity

The relationship between price elasticity and total revenue received by producers of a commodity can be understood through the concept of price elasticity of demand.

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to changes in price. It helps determine how sensitive consumers are to price changes and how this affects the total revenue received by the producers.

Generally, there are three possible scenarios:

1. Elastic demand: When demand is elastic, a small change in price leads to a proportionately larger change in quantity demanded. In this case, the price elasticity of demand is greater than 1 (PED > 1). If a producer decreases the price of a commodity in an elastic market, the quantity demanded will increase significantly, resulting in a larger percentage increase in total revenue. Conversely, increasing the price will lead to a significant decrease in quantity demanded, resulting in a larger percentage decrease in total revenue.

2. Inelastic demand: When demand is inelastic, a change in price has a relatively smaller impact on quantity demanded. In this case, the price elasticity of demand is less than 1 (PED < 1). If a producer decreases the price of a commodity in an inelastic market, the quantity demanded will increase, but not by a significant proportion. As a result, the percentage increase in total revenue will be smaller. Similarly, increasing the price will result in a smaller percentage decrease in total revenue.

3. Unitary elasticity: When demand has unitary elasticity, the percentage change in price and quantity demanded is the same (PED = 1). In this case, total revenue remains constant regardless of price changes. A decrease/increase in price will result in an equal percentage increase/decrease in quantity demanded, resulting in no net effect on total revenue.

To determine the impact of price elasticity on total revenue, you would need to calculate the PED for the specific commodity and market. The formula to calculate PED is:

PED = % change in quantity demanded / % change in price

Using this formula, you can analyze how changes in price impact quantity demanded and subsequently affect total revenue. Higher price elasticity implies a larger impact on total revenue, while lower price elasticity implies a smaller impact.