Price Elasticity of Demand & Total Revenue

Question 1

What is the relationship between the elasticity of the demand curve (inelastic or elastic) & an increase/decrease in total revenue?
What is the reasoning behind the relation?

Answer 1

•When demand price elastic a ⬇️ in price-> ⬆️ in total revenue 💰
- Consumers willing to pay ⬇️- demand ⬆️ … ⬆️ spending
When demand price inelastic a ⬇️ in price-> ⬇️ in total revenue 💰
- Consumers willing to pay ⬆️- … ⬇️ price-> ⬇️ spending & ⬇️ profit

When demand price elastic an ⬆️ in price-> ⬇️ in total revenue 💰
- Consumers ✖️ willing to pay ⬆️- demand falls … ⬇️ spending
When demand price inelastic an ⬆️ in price-> ⬆️ in total revenue 💰
- Consumers willing to pay ⬆️- demand ⬆️ … ⬆️ spending

Question 2

How does elasticity change along the PED curve?

Answer 2

Elasticity ⬇️ as you move along PED curve … elastic at top left & inelastic at bottom right

Question 3

What is the optimum point for maximising revenue?

Answer 3

Mid point = unit elasticity- optimum point for maximising revenue

Question 4

Why is the midpoint optimum for maximising revenue?

Answer 4

When demand elastic- ⬆️ price BUT consumers ✖️ willing to pay ⬆️ price … inefficient

When demand inelastic- consumers willing to pay ⬆️ price but 🚘 priced ⬇️ … inefficient

… when price in middle (unit elasticity -1)- optimal as 🚘 priced at max level consumers willing to pay … efficient