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  • How Is Total Revenue Affected by A Good Being Elastic or Inelastic?

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    Đào Thị Thùy Trang
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    Elasticity measures how responsive quantity demanded is to changes in price. Goods with close substitutes and that are not necessities tend to be more price elastic, meaning quantity demanded responds more to price changes. Inelastic goods have few or no close substitutes and are often necessities, so quantity demanded does not vary much with price changes. For inelastic goods, total revenue rises when price increases as the drop in quantity is small. But for elastic goods, total revenue falls when price rises as quantity demanded falls substantially.

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    MICROECONOMICS REVIEW

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    Elasticity measures how responsive quantity demanded is to changes in price. Goods with close substitutes and that are not necessities tend to be more price elastic, meaning quantity demanded responds more to price changes. Inelastic goods have few or no close substitutes and are often necessities, so quantity demanded does not vary much with price changes. For inelastic goods, total revenue rises when price increases as the drop in quantity is small. But for elastic goods, total revenue falls when price rises as quantity demanded falls substantially.

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    15 views2 pages

    How Is Total Revenue Affected by A Good Being Elastic or Inelastic?

    Uploaded by

    Đào Thị Thùy Trang
    Elasticity measures how responsive quantity demanded is to changes in price. Goods with close substitutes and that are not necessities tend to be more price elastic, meaning quantity demanded responds more to price changes. Inelastic goods have few or no close substitutes and are often necessities, so quantity demanded does not vary much with price changes. For inelastic goods, total revenue rises when price increases as the drop in quantity is small. But for elastic goods, total revenue falls when price rises as quantity demanded falls substantially.

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    of 2

    MICROECONOMICS

    1, Elastic - quantity demanded responds substantially to changes in price


    2, Inelastic - quantity demanded responds only slightly to changes in price
    3, What determines the price elasticity of demand?

    Determinants Inelastic – ít co dãn Elastic – co dãn nhiều

    Has no substitutes or hard to Close substitutes are


    find substitutes. available.
    Available of close substitutes Eg: Sun cream Eg: Breakfast Cereal
    Although the price increases, You can eat rice, noodle,
    the quantity demanded of sun pancakes for breakfast
    cream doesn’t change instead.
    Necessity Luxury
    Eg: Insulin is a necessary good Eg: Caribbean Cruises
    for people, so although P When P rises  quantity
    Necessities vs. luxuries increases, it causes little or no demanded falls
    decrease in quantity
    demanded

    Broadly defined goods Narrowly defined goods


    Eg: Clothing Eg: blue jeans
    Definition of the market People need clothing to wear Has a lot of substitutes:
    every day, and it has no Shorts, T-shirts, Black
    substitutes. jeans,…
    In the short run In the long run
    People cannot handle in the When have long time,
    short run. people can buy smaller
    Time horizon Eg: the price of gasoline rises cars to reduce the
     It’s hard to find another quantity demanded, or
    good to replace gasoline in a they can live closer to
    short time. where they work in the
    long run.

    How is total revenue affected by a good being elastic or inelastic?


    Elastic:

    - D curve is flat
    - When the price rises, the quantity demanded falls significantly
     Revenue falls

    Inelastic:

    - D curve is steep
    - When P rises, Qd falls slightly
     Revenue rises

    How are necessities, luxuries and inferior goods


    affected by income?

    Income rises  necessities quantity demanded rises (inelastic)


    Income rises  luxuries quantity demanded rises (elastic)
    Income rises  inferior goods quantity demanded falls

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