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On page 133, BPP textbook F5 states that :
-“On circumstances of elastic demand, increases in prices will bring decreases in revenue and decreases in price will bring increases in revenue. Management therefore have to decide whether the increase/decrease in costs will be less than/greater than the increases/decreases in revenue”.
I doubt the validity of the statement, for example, in case PED=0.13/0.12=1.083333>1 (elastic), assuming that the initial price is P and the initial quantity is Q; a 12% decrease in price will bring 13% increase in quantity demanded. The price is now 0.88P and the quantity demanded is now 1.13Q, therefore, total revenue will be 0.9944PQ, which is smaller than initial revenue PQ, that contradicts with the statement above.-“In circumstances of inelastic demand, prices should be increased because revenues will
increase and total costs will reduce (because quantities sold will reduce)”.
I doubt the validity of the statement, for example, in case PED=0.11/0.12=0.9166<1 (inelastic), assuming that the initial price is P and the initial quantity is Q; a 12% increase in price will bring 11% decrease in quantity demanded. The price is now 1.12P and the quantity demanded is now 0.89Q, therefore, total revenue will be 0.9968PQ, which is smaller than initial revenue PQ, that contradicts with the statement above.
I think these two statements are only true in almost cases, not in every circumstances!
Please help me explain more about this point.
Thank you!The statement in the book is not correct.
If demand is elastic, the changes in the price will mean big changes in the demand.
If it is inelastic then changes in the price will mean low changes in the demand.The effect on the revenue and on the profit depends on the exact figures, and although the statements are likely to be true most of the time, they are not automatically true all of the time. The last sentence of your post is correct 🙂
What is explained in my free lectures on this is more than enough for the exam. (The free lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well. If you are watching the lectures then you do not really need a Study Text – the important book is a Revision Kit, because practice on exam-standard questions is vital.)
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