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The Effects of Price Elasticity of Demand September 23, 2008

Posted by petrarcanomics in Markets: Supply & Demand, More Markets & Elasticity.
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Elasticity has profound real-world effects on the way businesses price their products. Price and quantity of demand have an inverse relationship.

If a product is price inelastic, it means that a change in price will cause a smaller relative change in quantity, meaning that an increase in price will dominate the decrease in quantity causing a price increase to lead to a total revenue increase. A decrease in price will dominate the increase in quantity causing a price decrease to lead to a total revenue decrease.

If a product is price elastic, it means that a change in price will cause a larger relative change in quantity, meaning that an increase in price will be dominated by the decrease in quantity causing a price increase to lead to a total revenue decrease. A decrease in price will be dominated a larger quantity increase causing a price decrease to lead to a total revenue increase.

If a price is unit elastic to its demand, then a price increase or decrease will cause no change in total revenue because the change in price will be equally balanced with a commensurate change in quantity.

For more on elasticity of demand, see Reffonomics.

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