(a) Define price elasticity of demand (b) Distinguish between elastic demand and Inelastic demand (C)...
(a) Define price elasticity of demand
(b) Distinguish between elastic demand and Inelastic demand
(C) Using diagrams. explain what happens to a traders total revenue demand for his product is:
(i) elastic
(ii) inelastic
Explanation
a) Price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in its price
OR
Price of elasticity of demand = \(\frac { \text {%Change in quantity demanded}} {\text {%change in price}}\)
OR Price elasticity of demand = \(\frac {\bigtriangleup Q} {\bigtriangleup P}\) X \(\frac {\bigtriangleup P} {\bigtriangleup Q}\)
b) Distinguish between elastic demand and inelastic demand:
Demand is said to be elastic when price results in a more than proportionate change in quantity demanded. On the other hand, demand Said to be inelastic when a change in price results in a less than proportionate change in quantity demanded.
(c)(i) If demand for a trader's product is elastic, a fall in price will result in a more than proportional increase in quantity demanded. In such a case, the traders total revenue will increase. This is illustrated below.
Total Revenue before price fall = area of OP\(_{1}\) TQ\(_{1}\)
Total Revenue after price fall = area of OP\(_{2}\) RQ\(_{2}\)
(ii) If demand for a trader's product is inelastic. a fall in price will result in a less than proportionate increase in quantity demanded. In such a case, total revenue of the trader will fall as illustrated below
Total Revenue before price fall = area of OP\(_{1}\) SQ\(_{1}\)
Total Revenue after price fall = area of OP\(_{2}\) TQ\(_{2}\)