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PED, Price Changes and TR

IB HL Econs
by

Ruru (Juan Ru) Hoong

on 27 April 2013

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Transcript of PED, Price Changes and TR

Price Elasticity of Demand
& Total Revenue Enver, Ian, JK, Andre, and Ruru The Role of PED for Firms:
Making Price Changes and Effect on Total Revenue Change In Price when 0<PED<1
(demand is price inelastic) When demand is inelastic, price and total revenue move in the same direction.
When price changes, the quantity demanded changes proportionately less than price
% Change in Price > % Change in Quantity Demanded Change In Price when PED=1 Price elasticity of demand =
(Percentage change in quantity demanded) / (percentage change in price)

If the price-elasticity of demand is greater than 1, then the demand is elastic.
If equal to 1, then the demand is unit elastic.
If less than 1, then the demand is inelastic. Price ($) Price ($) Quantity
Demanded Price inelastic
A rise in prices will shorten the demand, but increase the total revenue.
Firm’s would increase the prices of their products to maximise revenue on an inelastic good. Price ($) Quantity
Demanded
of Dumplings Revenue
=$200 Revenue
=$270 $4 50 Quantity
Demanded
of Dumplings $6 45 Change In Price when PED>1
(demand is price elastic) When demand is elastic, price and total revenue move in opposite directions.
When price changes, the quantity demanded changes proportionately more than price
% Change in Price < % Change in Quantity Demanded Price ($) Price elastic hamburgers
Increase in price: $4 to $5= 20%
Decrease in quantity demanded: 50 to 20 hotdogs= 60%
PED: 3
Total revenue falls from $200 to $100 Price ($) Quantity
Demanded
of Hamburgers Revenue
=$200 Revenue
=$100 $4 50 Quantity
Demanded
of Hamburgers $5 20 A profit-maximizing firm should always raise the price of a good when there is inelastic demand, because total revenue will increase and costs are reduced as they are selling less goods at a higher price. Unit elastic demand, that is Price elasticity will always equal to 1.
Change in price of a good will have a proportionate, opposite change in quantity demanded D A B C The demand curve of a unit elastic demand diagram will have price elasticity of 1 at every point.
Total revenue will always be the same
A + B = B + C Price elasticity of demand is a measure of how much the quantity demanded of a good will respond to a change in the price of that good Total Revenue For a company, this is the total amount of money received by the company for goods sold or services provided during a certain time period.

Total Revenue = Price of an item x Quantity sold
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