Authors libby rittenberg 241

Now consider diet cola Suppose 1,000 cans of diet cola per day are demanded at a price of $0.50 per can Total revenue for diet cola equals $500 per day (=1,000 cans per day times $0.50 per can) If an increase in the price of diet cola to $0.55 per can reduces quantity demanded to 880 cans per month, total revenue for diet cola falls to $484 per day (=880 cans per day times $0.55 per can) As in the case of gasoline, people will buy less diet cola when the price rises from $0.50 to $0.55, but in this example total revenue drops In our first example, an increase in price increased total revenue In the second, a price increase left total revenue unchanged In the third example, the price rise reduced total revenue Is there a way to predict how a price change will affect total revenue? There is; the effect depends on the price elasticity of demand Elastic, Unit Elastic, and Inelastic Demand To determine how a price change will affect total revenue, economists place price elasticities of demand in three categories, based on their absolute value If the absolute value of the price elasticity of demand is greater than 1, demand is termed price elastic If it is equal to 1, demand is unit price elastic And if it is less than 1, demand is price inelastic Relating Elasticity to Changes in Total Revenue When the price of a good or service changes, the quantity demanded changes in the opposite direction Total revenue will move in the direction of the variable that changes by the larger percentage If the variables move by the same percentage, total revenue stays the same If quantity Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 241