if a price cut decreases total revenue, demand is elastic. if a price cut decreases total revenue, demand is inelastic. if a price cut leaves total revenue unchanged, demand is unit elastic.
Inelastic demand means that the demand changes very little as the price rises or falls. If prices drop and people don't buy any more of the item, total revenue declines.
Price elasticity of demand is used to determine how changes in price will effect total revenue. If demand is elastic(>1) a change in price will result in the opposite change in total revenue.(+P=-TR) When demand is unit elastic(=1) a change in price wont change total revenue. If demand is inelastic a change in price will result in a change in total revenue in the same direction.(+P=+TR)
on the linear demand curve, demand is elastic at price above the point of unitary elasticity so a price increase will decrease the total revenue.
elastic
if a price cut decreases total revenue, demand is elastic. if a price cut decreases total revenue, demand is inelastic. if a price cut leaves total revenue unchanged, demand is unit elastic.
Inelastic demand means that the demand changes very little as the price rises or falls. If prices drop and people don't buy any more of the item, total revenue declines.
Price elasticity of demand is used to determine how changes in price will effect total revenue. If demand is elastic(>1) a change in price will result in the opposite change in total revenue.(+P=-TR) When demand is unit elastic(=1) a change in price wont change total revenue. If demand is inelastic a change in price will result in a change in total revenue in the same direction.(+P=+TR)
on the linear demand curve, demand is elastic at price above the point of unitary elasticity so a price increase will decrease the total revenue.
elastic
increase
When a reduction in price results in a decrease in total revenue.
demand is inelastic
Unit elastic
Marginal Revenue is the derivate (rate of change) of total revenue. Total revenue is = Price x Quantity. For instance, if the demand curve was Q = 100 - P, find the inverse demand (P = 100 - Q). Total Revenue = 100Q-Q^2Therefore marginal revenue is the derivative of 100Q - Q^2.MR = 100 - 2Q (thus twice the negative slope).In short: inverse demand x Q, find the derivative.Source(s):Microeconomic Theory Class
For any given change in the price(rise or fall), where demand is elastic there is a more than proportionate change in quantity demanded. When the price elasticity of demand for a good is elastic (|Ed| > 1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa.
when price changes it is called inelastic demand and when quantity of demand change that is called elastic of demand.