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Relationship of Gst and Price Elasticity

In: Business and Management

Submitted By shadeen
Words 1106
Pages 5
Concept of Price Elasticity and Total Revenue
The importance of the price elasticity of demand for a business can be shown by the effect that it has on total revenue. The business will want to know whether a proposed price change will increase or decrease total revenue. Total revenue, by definition, is equal to the price times the quantity sold (TR=PxQ). [sometimes, when dealing with elasticity, the language used may call this total expenditures instead of total revenue, but it has the same meaning].Note what happens to the results of this formula (TR=PxQ) if a price change is involved. Due to the law of demand, the price will move in one direction, and the quantity sold will move in the other direction. Unless the price change and quantity change are both for the same percentage (unit elastic), then total revenue will also change whenever a price change is involved. The question is, does total revenue increase, or decrease? The answer depends on the direction of the price change along with the price elasticity of demand. If the price elasticity of demand is elastic (greater than 1), then that means that the quantity change is more than the price change. So total revenue (price times quantity) will decrease for a price increase, and increase for a price decrease. If the price elasticity of demand is inelastic (less than 1), then that means that the quantity change is less than the price change. So total revenue (price times quantity), increases for a price increase, and decreases for a price decrease.
In summary: Elastic demand, price increase: total revenue decreases -Elastic demand, price decrease: total revenue increases-Inelastic demand, price increase: total revenue increases-Inelastic demand, price decrease: total revenue decreases-Unit elastic demand: total revenue does not change. So, from this, the price elasticity is an important element in the...

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