Price Elasticity of Demand and Total Revenue Research (Term Paper Sample)

PRICE ELASTICITY OF DEMAND AND TOTAL REVENUE
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Abstract
This paper will provide an explanation of the relationship between the price elasticity of demand as well total revenue in relation to the impacts of various forms of elastic ties such as elastic, inelastic, unit elastic among others especially in business decisions and strategies to maximize profits. The paper will also provide an explanation whether the price elasticity of demand or supply is more elastic over a shorter or longer period of time with support examples. Finally, the paper will also highlight the impacts of government and market imperfections or failures on the price elasticities of demand as well as supply.
Price elasticity of demand and total revenue
For instance, the law of demand stipulates that increase in price is inversely proportional to the demand of any good or service and conversely. Price elasticity of demand stipulates how much quantity demanded will increase in case there is direct decrease in prices, on the contrary the law of supply stipulates that in the price increases, the quantity supplied of any good and service will directly increase and at the same time when price decreases, quantity supplied of any good or service will also increase (Institute of Chartered accounts, 2016). Therefore, the concept of price elasticity of supply measures the degree of sensitivity or responsiveness of production or supply to a change in price meaning that the ultimate total revenue is found by multiplying the quantity of goods or services sold by its market price which measures how much any firm generates from selling its products (Institute of Chartered accounts, 2016).
For instance, price elastic refers to the change in price that cause a bigger change in demand of any good and service for example if price drops by 20% and demand increase by 80 % is a clear indication that the price elastic demand will be -40 some of the examples of products that fall under price elastic demand include; Shell petrol and Tesco bread among others. On the other hand, income elastic means that any change in income causes a bigger percentage of change in demand for example in case income goes up by 10% people will spend 20% more on luxury goods and services as shown below in the graph.
On the other hand, price inelastic refers to change in price that is attributed to smaller change in demand. For example, goods and services are said have inelastic price when any increase in price causes a corresponding but smaller percentage fall in demand in that if price of diesel falls by 30% but the demand for diesel only increase by 10% then the Price elastic demand will be -0.33. Some of goods with inelastic prices include; petrol, tap water diamond, cigarettes and apple iPhones. Example of price inelastic graph is show below.
Furthermore, Unit elastic describes the supply or demand curve that is perfectly responsible to changes in price which is the quantity supplied or demanded changes according to the same percentage as the change in the price of goods. For example any curve with elasticity of 1 is known to be unit elastic. Furthermore, unit elastic demand refers to elasticity price that assumes a move to increased prices will conversely cause a proportional decrease in the demand of goods for example, the unit elastic demand for a one dollar move increase in the price of goods will ultimately cause a one unit decrease in the demand of the same good hence leaving revenues without change (Nghiem, Wilson & Blakely, 2011). An example of unit elastic demand curve is show below containing the change in the price of Colas against quantity of six packs.
For instance, profit maximization occurs whereby there is high change in total revenue over total cost so the bigger the gap between the total revenue and the total cost result to maximum profits and therefore, firms can maximize profits if they produces at an output where marginal revenue is equal to marginal cost besides, at this level, the demand of the products sold should be higher which will trigger a corresponding increase in the supply (Nghiem, Wilson & Blakely, 2011). Besides the firm can maximize profit is increasing total revenue by increasing its total revenue by selling more items or by raising the price, however, raising the price is dependent on the level of demand of the products, raising the price of the products while when demand is low can negatively affects the firm’s profits since hardily will the products move (Institute of Chartered accounts, 2016). Meaning that it is convenient an...