Discuss whether or not a firms revenue would increase, in response to price and income changes, if the price elasticity and income elasticity of demand for its product became highly elastic. [12]
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Introduction
Transfer-Encoding: chunked Discuss whether or not a firm?s revenue would increase, in response to price and income changes, if the price elasticity and income elasticity of demand for its product became highly elastic. [12] The term price elasticity of demand is a measurement of the responsiveness of the quantity demanded for a product in relation to changes in the price of the product. Income elasticity of demand measures the responsiveness of the quantity demanded of a certain product in relation to changes in the incomes of customers. A highly price elasticity of demand means that as the price changes, the quantity demanded falls or increases by a disproportionately large amount, relative to the change in price. The price elasticity of demand is calculated by dividing the percentage change in the quantity demanded for a product, by the percentage change in its price. ...read more.
Middle
However, if the price of the product increases, the firm should expect their total revenue to fall as consumers will consume substantially less than before, which would lead to an overall fall in revenues as the increase in price would not make up for the fall in the quantity consumed. Also of note is the magnitude of the price change. Usually, the price elasticity of products varies with price, as such, a fall in price may only be able to increase revenues to an extent, because as the price begins to fall, the price elasticity of demand is likely to begin falling. This is because as the price of the product decreases, the purchase takes up a smaller proportion of the consumer?s income, thus it becomes a less significant purchase and in turn, it causes less time being dedicated to making the purchase and as such the price becomes less significant, thus lowering the price elasticity of demand. ...read more.
Conclusion
This would mean that as income increases the demand for the good increases disproportionately, meaning that as customers have more money, they purchase more and more of the product. Thus, if the YED is a high positive value, the firm can expect their revenues to rise with a rise in income and fall with a fall in income. However, if the YED is a high negative value, then this would indicate an inferior good meaning that the firm should expect a strong inverse correlation between the quantity demanded. Thus, if income falls, they should expect and increase in revenue and a fall in revenue if income increases. Overall, given a highly price and income elastic product, the firm can expect a raise in revenue if the price falls; and, if the income elasticity is negative, they can expect a raise in revenue with a fall in incomes, while if the value is positive, they can expect a raise in revenue with a raise in incomes. ...read more.
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