Relationship between elasticity and total revenue
The total revenue a company earns is the amount of product it sells times the price of that That price and quantity depend on the company's supply curve, which Customers have an inverse relationship with price -- they want to pay less for. In economics, the total revenue test is a means for determining whether demand is elastic or inelastic. If an increase in price causes an increase in total revenue. In Topic , we introduced the concept of elasticity and how to calculate it, but Unitary elasticities indicate proportional responsiveness of either demand or supply, . relationship between the price elasticity of demand and revenue is TRUE? Suppose that, if the price of a good falls from $10 to $8, total expenditure on.
As in the case of rising prices for oatmeal, consumers can shift their purchases to similar products if they are readily available. Coca-Cola and Pepsi are products that can be easily substituted for each other when prices change. This is an example of elastic demand. If the alternatives are limited, the demand is less elastic. Necessities are products that people must have regardless of the price. Everyone has to drink water, so if the water company raises prices, people continue to consume and pay for it.
Luxuries are optional; they aren't necessary to live. Large-screen HDTVs are nice to have, but if the prices go up, consumers can put off buying them. Share of the consumer's income: Products that consume a high proportion of a family's income are sensitive to price increases. A car is a good example.
Increases in car prices can cause a family to delay purchasing a new car. They keep their old car longer and make the necessary repairs.
Total revenue test
However, if a grocery store increases the price of toothpicks, consumers still buy them because the price isn't a big piece of their income.
Short-term versus long-term timing: Gasoline is an excellent example of a product that prices inelastic in the short term but elastic in the long term. When gas prices go up, the consumer still has to buy gas to get to work. However, if gas prices stay high for the long term, consumers make changes.
They may buy more fuel-efficient cars, set up a carpool with other workers, or start taking a train or bus to work. Why Elasticity Is Important Marketers must have some knowledge about the elasticity of their products to set pricing strategies. If marketers know that the demand for their products is inelastic, then they can raise prices without fear of losing sales. And you can see it visually right over here.
This height right over here is 9. And this width right over here is 2. And your total revenue is going to be the area of this rectangle. Because the height is the price. And the width is the quantity. So that total revenue is the area right over there. Now, let's go to point-- let me do a couple of them just to really make it clear for us. Let's try to point B.
What is the relation between price elasticity and revenue? - Quora
So at point B when our price is 8 and our quantity is 4, 4 per hour. And once again, you can see that visually.
- Total revenue and elasticity
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The height here is 8. And the width here-- so the height of this rectangle is 8. And the width is 4. The total revenue is going to be the area. It's going to be the height times the width just like that. Now, let's go to a point that I haven't actually graphed here. Actually, let me just-- actually, I'll go through all the points just for fun. So now at point C, we have 5.
The quantity is 9. And you have another 4. So that is So once again, it's going to be the area of this rectangle. Area of that rectangle right over there. So you might already be noticing something interesting. As we lower the price, at least in this part of our demand curve, as we lower the price, we are actually increasing not just the quantity were increasing the total revenue. Let's see if this keeps happening. So if we go to point D, I'll do it in that same color.
And we are selling 11 units. So 11 times 4. Let's see, this is going to be 44 plus 5. Once again, that is So that this rectangle is going to have the same area as that pink one that we just did for scenario C. And I'll actually just do one more down here, just to see what happens. Because this is interesting. Now we lower the price. And it looks like things didn't change much.
Total revenue and elasticity (video) | Khan Academy
And now, let's go-- let's just do one more point actually for the sake of time. And I encourage you to try other ones. Try F on your own. My quantity is 16 burgers per hour. I sell a total of 32 burgers. Now actually, let's just do the last one, F, just to feel a sense of completion.
I sell 18 burgers per hour. And once again, that's the area of this rectangle, this short and fat rectangle right over here. And E was the area-- the total revenue in E was the area of that right over there.
And you could graph these just to get a sense of how total revenue actually changes with respect to price or quantity. Lets plot the total revenue with respect to quantity.
So let's try it out. So if you-- let me plot it out. So this is going to be total revenue. And this axis right over here is going to be quantity. And we're going to, once again, go from-- let's see. And this is 20 right over here. And then total revenue. Let's see, it gets as high-- it gets pretty close to This is 10 20, 30, 40, and So that's 50, 40, 30, 20, and So when our quantity is 2, and our price is 9. Well, we don't have price on this axis right over here.
But when our quantity is 2, our total revenues So it's going to be something like there. Then, when our quantity is 4, our total revenue is Then, when our quantity is 9, our total revenue is almost So right over there. And then, when it's 11, it's also at that same point right over there. And then, when we are quantity is 16, our total revenues And then finally, when our quantity is 18, our total revenue is