* When demand is inelastic (a price elasticity less than 1), price and total revenue move in the same direction. * • When demand is elastic (a price elasticity greater than 1), price and total revenue move in opposite directions. * • If demand is unit elastic (a price elasticity exactly equal to 1), total revenue remains constant when the price
Define elastic, inelastic, and unitary elasticity means. How are these related to total revenue?
Explain how the elasticity changes as price increases. Why is this happening?
With unitary elasticity, the percentage increase in price calls forth an offsetting decrease in demand. If the seller doubles his price, he sells half as much. Similarly, a percentage decrease in price calls forth an offsetting increase in demand. If he halves his price, he sells twice as much. Either way, the seller brings in the same revenue. (His profit—the amount he makes after subtracting his costs from his revenue—may vary, but that's another story.) When a producer or seller faces unitary elasticity of demand, she can't increase revenue by increasing or decreasing her price. Why? Because the quantity demanded will exactly offset the effect of any change in price. However, that is rarely the case in the real world

A change in price may result in only a small increase in demand and revenue. The examples I'm choosing here use round numbers and simple relationships for the sake of clarity. But many producers face markets in which a price decrease of 10 percent may increase revenue by only 2 percent. This may or may not be a profitable decision for the producer. It depends on his costs. However, when a price reduction increases both the quantity demanded and revenue, it is, by definition, a case of elasticity of demand. | $300 | × | 80 gals. | = | $240 |
The result here is lower revenue, and an instance of inelastic demand. In