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Elasticity of Demand and Total Revenue - Assignment Example

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The assignment "Elasticity of Demand and Total Revenue" focuses on the critical analysis of the relationships between the elasticity of demand and total revenue for the following ranges along the demand curve, using the attached graphs for the elasticity of demand, and total revenue…
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Elasticity of Demand and Total Revenue
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While the reduction in price per unit of the commodity tends to reduce revenue, an increase in quantity sold caused by it tends to increase the revenue. Price elasticity remaining greater than one above the midpoint C implies that the percentage increase in quantity demanded exceeds the percentage fall in price which causes the total revenue to increase. Therefore, up to the level of output Q which corresponds to the mid-point C of the demand curve, the total revenue curve goes on increasing.

Inelastic range (e < 1): as we move down from the mid-point C of the demand curve, price elasticity being less than one implies that the relative increase in the quantity demanded is less than the relative fall in price which causes the total revenue curve to decline. Therefore beyond output OQ corresponding to the midpoint C of the demand curve, the total revenue curve is sloping downward as shown in the figure.

Unit-elastic range: since on the demand curve up to the midpoint C at which price elasticity is equal to one, total revenue goes on increasing as price elasticity is greater than one and below the midpoint, C, total revenue decreases as price elasticity of demand is less than one. Therefore it follows that the total revenue will be maximum at output OQ corresponding to the midpoint C of the demand curve at which price elasticity is equal to one. Read More
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