- This topic has 4 replies, 2 voices, and was last updated 1 year ago by
.
- Posts
When the elasticity of demand of a product is equal to 1, there will be no change to total expenditure despite price changes. The explanation said that 2 proportions of changes are equal and have cancelled out the effect on total expenditure. However, I still couldn’t get it. Why change in sales volume causes no change to total expenditure? Can you please give me an example for this?
Looking forward to your answer,
Iniss.When the elasticity of demand of a product is equal to 1, there will be no change to total expenditure despite price changes.
This is because the percentage change in quantity demanded is equal to the percentage change in price, resulting in a cancelation effect on total expenditure.
In other words, the increase in price is proportionally offset by the decrease in quantity demanded, leading to no net change in total expenditure. This phenomenon occurs at the point where the revenue curve is at its peak, known as unitary elasticity.
In summary, when a product exhibits unitary demand this means that a given percent shift in the price of the product results in an equal but opposite percent change in the amount of product demanded.
I could not find any link between total expenditure and PED.
For example, quantity demanded is 10000 units when price is $60 and 15000 units when price is $30. The PED is 1. Variable cost/unit is $2 and fixed cost is $4000. Therefore, total costs for 10000 units is $24000 while 15000 units is $34000. Total expenditure for higher level of quantity demanded is obviously higher than that for lower one.
Where have you found this statement
You are stuck on a very small part of the syllabus:
Calculate and explain the price elasticity of demand.Price elasticity of demand =
Change in quantity demanded, as a percentage of demand / Change in price, as a percentage of the priceElastic demand
If the % change in demand > the % change in price, then price elasticity > 1.
Demand is ‘elastic’, i.e. very responsive to changes in price.
• Total revenue increases when price is reduced.
• Total revenue decreases when price is increased.
Therefore, price increases are not recommended but price cuts are recommendedInelastic demand
If the % change in demand < the % change in price, then price elasticity < 1.
Demand is ‘inelastic’, i.e. not very responsive to changes in price.
• Total revenue decreases when price is reduced.
• Total revenue increases when price is increased.
Therefore, price increases are recommended but price cuts are not recommended.If you know this then you know enough!
Why can you not move on and accept that it means……
In other words, the unit elastic demand implies that the percentage change in quantity demanded is exactly the same as the percentage change in price.
When the elasticity of demand of a product is equal to 1, there will be no change to total expenditure despite price changes. This is because the percentage change in quantity demanded is equal to the percentage change in price, resulting in a cancelation effect on total expenditure.
In other words, the increase in price is proportionally offset by the decrease in quantity demanded, leading to no net change in total expenditure.
For example, if it sells smartphones with unit elastic demand, a 10% price increase will lead to a 10% decrease in the quantity demanded. Thus, the company’s revenue will decline by 10% as well as expenditure.
- You must be logged in to reply to this topic.