A. Define price elasticity of demand
B. Distinguishing between elastic demand and inelastic demand
Ci. Using diagrams, explain what happens to a trader's total revenue when his price falls given that demand for his product is:
- elastic
Cii. Using diagrams, explain what happens to a trader's total revenue when his price falls given that demand for his product is:
inelastic
A. Price elasticity of demand can be defined as the degree of responsivness of a change in quantity demanded to change in price of a
commodity. It is always negative and it id calculated as:
e = AQd/AP x P/Qd
OR
e = percentage change in qd/ percentage change in p
B. Elastic demand is also known as fairly elastic demand. Demand is said to be elastic when a small change in price leads to a greater
change in the quantity demanded. Elastic demand is greater than one.
Inelastic demand is also known as fairly inelastic demand. Demand is said to be inelastic when a larger change in price leads to a
smaller change in the quantity demanded. Inelastic demand is less than one.
Ci. If the demand is elastic, a decrease in price will result to an increase in the total revenue.
From the diagram above, the price falls from P1 to P2 while the quantity demanded increases from Q1 to Q2.Therefore as the
quantity increases, the revenue og the trader will also increase.
Cii. If the demand for the product is inelastic, a fall in the price will reduce the total revenue of the trader.
Price
From the diagram above, the price falls from P2 to P1 while the quantity demanded also decreases from Q2 to Q1. Therefore, as
the quantity of the trader falls, the total revenue will also fall.
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