Guell (2015), in their book Issues in Economics Today, elasticity is a measure of how much buyers and sellers respond to changes in market conditions. It allows us to analyze supply and demand with greater accuracy. Here, a manager wants to increase revenue of his firm. The reason how the he would increase revenue is explained below:
Reason I - elastic demand curve
With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
Hence, if the demand of product is elastic then the manger should not raise the price in order to increase firms’ revenue.
Reason II - inelastic demand curve
With an inelastic demand curve, an increase in the price leads to an increase in quantity demanded that is proportionately larger. Thus, total revenue increases.
Figure 2: When demand is inelastic
Illustration:
Ep = dQ/dP * P/Q
= - 0.81
= 0.81 < 1, inelastic
At, combination A, Total Revenue = 200 * 12 = Rs. 2400
Hence, if the demand of product is inelastic then the manger should raise the price in order to increase firms’ revenue.
To state more precisely, the concept of price elasticity of demand is highly applicable for managers of the company at the time of make pricing decision of their firm’s products and services. The core concept of it depicts that if the product of the company is inelastic then the manager can increase the price in order to increase the revenue of the company. By increasing the price of the product the revenue can be raised. Similarly, if the product appears to be elastic then it would be better that manger does not increase the price of the product.
Reference
Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-0078021817
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Guell (2015), in their book Issues in Economics Today, elasticity is a measure of how much buyers and sellers respond to changes in market conditions. It allows us to analyze supply and demand with greater accuracy. Here, a manager wants to increase revenue of his firm. The reason how the he would increase revenue is explained below:
Reason I - elastic demand curve
With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
Figure 1: When demand is elastic
Illustration:
At, combination A, Total Revenue = 200 * 12 = Rs. 2400
At, combination B, Total Revenue = 250 * 8 = Rs. 2000
Hence, if the demand of product is elastic then the manger should not raise the price in order to increase firms’ revenue.
Reason II - inelastic demand curve
With an inelastic demand curve, an increase in the price leads to an increase in quantity demanded that is proportionately larger. Thus, total revenue increases.
Figure 2: When demand is inelastic
Illustration:
At, combination A, Total Revenue = 200 * 12 = Rs. 2400
At, combination B, Total Revenue = 250 * 10 = Rs. 2500
Hence, if the demand of product is inelastic then the manger should raise the price in order to increase firms’ revenue.
To state more precisely, the concept of price elasticity of demand is highly applicable for managers of the company at the time of make pricing decision of their firm’s products and services. The core concept of it depicts that if the product of the company is inelastic then the manager can increase the price in order to increase the revenue of the company. By increasing the price of the product the revenue can be raised. Similarly, if the product appears to be elastic then it would be better that manger does not increase the price of the product.
Reference
Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-0078021817