What is the relationship between elasticity of demand and total revenue?
If demand is elastic at a given price level, then should a company cut its price, the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue.
What happens to revenue when demand is elastic?
b) If demand is price elastic, then decreasing price will increase revenue.
Which of the following is likely to have the most price elastic demand?
Music downloads likely to have most price elastic demand.
What happens to total revenue when price rises and supply is elastic?
For example, if a company’s supply curve is highly elastic with respect to price, then small changes in price due to factors outside the company’s control can make big differences in equilibrium price and quantity, and, therefore, in total revenue.
What are the 3 determinants of elasticity?
The main determinants of a product’s elasticity are the availability of close substitutes, the amount of time a consumer has to search for substitutes, and the percentage of a consumer’s budget that is required to purchase the good.
What is the most important determinant of price elasticity of supply?
Time
What does the cross price elasticity of demand tell us?
Cross elasticity of demand evaluates the relationship between two products when the price in one of them changes. It shows the relative change in demand for one product as the price of the other rises or falls.
What is the impact of time on elasticity?
Time also exerts considerable influence on the elasticity of supply. Supply is more elastic in the long run than in the short run. The reason is easy to find out. The longer the time period the easier it is to shift resources among products, following a change in their relative prices.
What is the impact of time on elasticity values and applications?
Definition of the market: A narrow definition of the product tends to result in more elastic demand, because of the availability of close substitutes. Time horizon: The longer the time period, the greater the elasticity, as consumers have more time to adapt and find substitutes.
Which two of the following are factors that cause price elasticity?
The four factors that affect price elasticity of demand are (1) availability of substitutes, (2) if the good is a luxury or a necessity, (3) the proportion of income spent on the good, and (4) how much time has elapsed since the time the price changed. If income elasticity is positive, the good is normal.
What are the factors that affect price elasticity of supply?
There are numerous factors that impact the price elasticity of supply including the number of producers, spare capacity, ease of switching, ease of storage, length of production period, time period of training, factor mobility, and how costs react.
What is an example of perfectly elastic supply?
If supply is perfectly elastic, it means that any change in price will result in an infinite amount of change in quantity. Suppose that you baked delicious cookies and your costs, including inputs and time, were $3 per cookie. At $3, you would be willing to sell as many cookies as you could.
Why is world supply perfectly elastic?
The world can supply with perfect elasticity due to the sheer volume it trades. As their costs are cheaper, most world supply is chaper than domestic supply could be, so the consumer buys little steel from domestic firms.
Can supply be perfectly elastic?
The PES for perfectly elastic supply is infinite, where the quantity supplied is unlimited at a given price, but no quantity can be supplied at any other price.
Why perfectly elastic demand curve is horizontal?
If you raise your prices, buyers can easily find someone else who will sell them wheat. In this situation, there is no way for you to raise your prices. If you do, people will simply buy wheat from someone else. This is why the demand curve is horizontal.
Who bears the tax burden when demand is perfectly elastic?
When One Party Bears the Tax Burden If supply is perfectly elastic or demand is perfectly inelastic, consumers will bear the entire burden of a tax. Conversely, if demand is perfectly elastic or supply is perfectly inelastic, producers will bear the entire burden of a tax.
Who pays more tax when supply is inelastic?
Taxes and perfectly inelastic demand. The burden of a tax falls most heavily on someone who can’t adjust to a price change. That means buyers bear a bigger burden when demand is more inelastic, and sellers bear a bigger burden when supply is more inelastic.