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If absolute value of price elasticity is greater than 1 then why would an increase in price would lead to a decrease in revenue and a decrease in price will have the opposite effect?
Ask42
Elasticity is defined as the percentage change in quantity for a given percentage change in price. If price goes up by 1% and quantity goes down by 2%, less revenue is generated, since (1.01*P)* (0.98*Q) < P*Q.
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True or false Inflation refers to a dramatic drop in prices?
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A complementary good. Substitute and complementary goods are determined by cross elasticity of demands. A substitute good has positive cross elasticity: the mercantile characteristics of this good increase if the same characteristic of a different good decreases. If the only two drinks in the world were orange juice and apple juice and the price of orange juice went up (causing concomitant reduction in demand for it), the demand for apple juice would increase. A complementary good has negative cross elasticity: the mercantile characteristics increase if the same characteristic of the complementary good also increases. Maybe if the demand for salami increased the demand for bread would also increase because most people who buy salami eat it on sandwiches. Obviously these are both classroom theoreticals because a lot of things go into determining demand for an item...the demand for salami could increase without a concomitant increase in demand for bread because people have found salami makes a great salad ingredient, or the demand for peanut butter could increase without a similar increase in jelly demand if everyone makes peanut butter cookies.
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