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If price elasticity is 1, revenue should stay the same right? However, if demand is 100 at a price of 20, revenue would be 2000. If price is reduced by 50% as a result demand increases by 50% elasticity should be 1, but the revenue is not the same, 10*150 = 1500.
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Please advise.
elasticity = %change in demand / %change in price
and you are given 50% change in price causes 50% change in demand, thus:
50%/50%=1
… note that calculation of ACTUAL NUMBERS:
% change = amount of change/initial value
hope it helps
The problem with your example is that elasticity varies constantly along demand curves, so when you vary prices and demand by 50% you are moving to a part of the curve where the elasticity is no longer 1.
Even taking a very small change will not give the same revenue. For example, say a price change of +1%:
Original price = 20, new = 20.2
Original demand = 100, new = 99Revenue = 99 x 20.2 = 1999.80
A price decrease of 1%:
New price = 19.80, new demand = 101
Revenue = 1999.80 [both results v close to 2,000]
Both are very close to the original.
Say elasticity = 2 (price sensitive)
Price increase of 1% to 20.2 would produce a fall in volume of 2% to 98
Revenue would now be 1,980.
Price decrease of 1% to 19.8 would produce a rise in volume to 102
Revenue = 2202.
So for a price elasticity of demand of greater than 2, you can increase revenue by decreasing price.
Your answer was correct and defined elasticity correctly, but perhaps didn’t answer the original question.
So its not necessary that unit elasticity will give same revenue and an elasticity of more than 1 will lead to increased revenue, right?
Thanks.At unit elasticity, revenue does not change for a small change in price – but the change has to be very small as unit elasticity only exists at one point on the demand curve.
If elasticity >1, lowering the price will produce a disporportionately large increase in volume so revenue will increase. (Raising the rpice would cause volume to fall off quickly and revenue would fall.)
If elasticity < 1, lowerng the price will have a small effect on volume, so revenue would decrease. Similarly, raising the price will not much affect volume and revenue would increase
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