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
11y ago#3The 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 = 99
Revenue = 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.
Dear Gromit:
was my answer correct?
11y ago#5Your answer was correct and defined elasticity correctly, but perhaps didn't answer the original question.
yes.. i agree .... thank u ... :)
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.
11y ago#8At 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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