Analyzing Price Elasticity and Total Revenue: GB540 Economics Report

This report examines the relationship between price elasticity of demand and total revenue, crucial concepts in economics. It begins by explaining the laws of demand and supply, and then delves into price elasticity as a quantitative measure of consumer and producer behavior. The report details the connection between price elasticity and total revenue, demonstrating how businesses can use elasticity to optimize pricing strategies and maximize revenue. It discusses the concepts of market period, short run, and long run in supply, highlighting the factors that influence price elasticity of supply. Real-world examples, such as antiques and volatile gold prices, illustrate the practical applications of these economic principles. Furthermore, the report addresses government interventions in the market and their potential impacts on elasticity, including subsidies and price controls. Overall, the assignment provides a comprehensive analysis of these core economic concepts, supported by relevant references.

Running Head: ECONOMICS 0
Economics
(Student Name)

ECONOMICS 1
Table of Contents
Relationship between price elasticity of demand and total Revenue..............................................2
Elasticity of Demand or Supply Over short term or long term........................................................3
Factors of Price elasticity of Supply –.........................................................................................3
Impact on the Elasticity of Demand and Supply.............................................................................5
References........................................................................................................................................6

ECONOMICS 2
Price Elasticity of Demand and Total Revenue Relationship
The behaviour of consumers and producers are different. Economist introduced demand
and supply concept to explain the producers and consumers behaviour in a better way. As per the
law of demand once the goods price increases the demand of the goods or services declines and
as per the law of supply once the extent of the goods formed is increased then the market price of
that product also upsurges. However, all the factors which impact the demand and supply are not
explained. Hence, elasticity – a type of quantitative measurement, was introduced in order to get
more details of the producers and consumers.
Price elasticity helps us understand the impact of the demand on the product due to its
changed price. If the product price increases the demand decreases. Here the price elasticity
helps us understand how much the demand of the quantity decreases. In the constantly changing
market, when the price of the product changes, elastic helps us understand the degree of change
in other things (Al-Sasi, Taylan & Demirbas, 2019).
There is an important connection among price elasticity of demand as well as total
revenue. After analysing the elasticity management changes the pricing for goods and other
services.
In order to increase the revenue of the company, the pricing of the goods and other
services must be correctly defined. In order to define a correct price one must do a thorough
analysis of price elasticity in order to forecast the marginal income. To describe a relationship
between marginal revenue and elasticity a mathematical formula is used.
When the demand of the price for a goods is inelastic the alteration in the number is
lesser than the price. Thus, the total revenue of the producer increases when there is an increase
in price and vice versa.
At the situation the demand of the price for a goods is elastic the alteration in the extent is
more than the price. Thus, the total revenue of the producers cataracts down when there is an
increase in price and vice versa.

ECONOMICS 3
At the time when the demand of the price for a product is component flexible the
alteration in the quantity is equal to the price of the product. Hence, the entire income does not
variant even when the price is increased. The demand curve is a four-sided hyperbola (Adenso-
Díaz, Lozano & Palacio, 2017).
When the demand of the price for a good is perfectly elastic, the demand quantity of a
product is not exaggerated by the price changes, causing the demand of the good to reduce down
to nil. Therefore, the demand curve is a parallel conventional line. For example - nobody will
pay a price of $10.01 for a good but if the same good is priced at $9.99 everyone will purchase it.
The impact of the price elasticity of the demand is measured by its effect on total
revenue. The business investigates if the rate change upsurges or diminutions the entire income.
Total revenue is the equivalent to the price eras the quantity sold. Due to the law of demand the
value moves in one track and the sold extent moves in additional way. Except the price variant
and the quantity variation are both of the similar fraction, then the income total will also get
amendment when the price vagaries. Now, does the income upsurge or reduces? The answer be
contingent on the way of the price change laterally with the price elasticity of demand. The
quantity change is more than the price change if the price elasticity of the demand is elastic.
If the price elasticity of demand is elastic, then it represent that the number change is less
than the value change. Hence the total income increases when the price increase and decreases
when the price decreases (Javan & Zahran, 2015).
Elasticity of Demand or Supply Over short term or long term
Factors of Price elasticity of Supply –
There are3 periods – Market Period, Short Run and Long Run

ECONOMICS 4
The Market Period is when the time occurs after the alteration in the marketplace price is
way too short for a producer to by changing the supplied quantity. Suppliers do not have a
choice to quote their price to sell goods. It is inelastic. There are few good that do not have any
market period.
The Short run - Due to the short time period the supply becomes more elastic. There is
not sufficient time to alteration the production; producers have very less time to respond to the
variation. E.g. – In short run when the gasoline price rises, producers get stuck with the lesser
fuel efficient machine and are expected to produce the same output. Once, they get some time to
adjust, producers have a choice to introduce better fuel efficient machine leading the production
cost to go down and increase the source quantity. Here the Price Elasticity of Supply becomes
more elastic. The manufacture and production increases in the plant by employed for longer
hours, by using all the accessible incomes to its highest capability and by having all the workers
do overtime. The slope is steeper to that of the supply curve in long run (Davidoff, 2016).
Long run – The longer the period the further is the elasticity of supply. Because over a
era of time new expertise gets adapted to the changed price so that more efficiency is created and
one gets more time to assign the capitals to the same field or the different field. The major
determining factor of price elasticity of source is TIME. E.g. – In order to produce new product
of their choice firms get time to make changes to their production plants (Chen et al., 2016).
When the time enhance, the supply become more elastic as well as the slope shrinkages
(become less slanted). Thus, a minor variation in price produces a huge variation in quantity
supplied.

ECONOMICS 5
SM
Ssr
Slr
Price
Quantity

ECONOMICS 6
Application of Price Elasticity of Demand
Antiques – It is impossible to reproduce antiques as they have high inelastic supply. The
change in demand and supply does not affect much. There are some other products which are
minimally affected.
Volatile Gold Prices – Gold prices are highly volatile. Sometimes they go high on a
moment and decrease dramatically in the next moment. It is due to the shifting of demand and
high inflexible supply. Producing gold is time consuming and expensive.
Impact on the Elasticity of Demand and Supply
Failure of Government and Market Imperfection
Intervention of Government in order to resolution the market imperfections can also
nosedive to attain a informally well-organized division of capitals. It is a state where
administration intervenes to correct the failure in the market which makes disorganization and

ECONOMICS 7
also clues to misallocating the scarce resource. E.g. – Firms get subsidies from the government
but this may create barriers for the new firms to entre due to their kept prices as these subsidies
protect the inefficient firm from competition.
Example of the failure of government
Government can reward the grants to the companies however it might also defend the
incompetent companies from the high rivalry that make fences to entrance for novel companies
due to the reason the values are reserved insincerely little. The grants as well as other support can
also lead to the matter of the ethical hazards
Governments can also hit the values such as extreme as well as minimum prices however;
it can create distortion that lead to shortage or the surplus situation.
Taxes on goods as well as facilities can nurture the prices insincerely as well as
misrepresent the well-organized process of the adding, taxes on the profits that can make a
disincentives result with the dishearten persons from employed firm (Bryan, Ye, Zhang &
Connor, 2018).

ECONOMICS 8
References
Adenso-Díaz, B., Lozano, S., & Palacio, A. (2017). Effects of dynamic pricing of perishable
products on revenue and waste. Applied Mathematical Modelling, 45, 148-164.
Al-Sasi, B. O., Taylan, O., & Demirbas, A. (2017). The impact of oil price volatility on
economic growth. Energy Sources, Part B: Economics, Planning, and Policy, 12(10),
847-852.
Bryan, B. A., Ye, Y., Zhang, J. E., & Connor, J. D. (2018). Land-use change impacts on
ecosystem services value: Incorporating the scarcity effects of supply and demand
dynamics. Ecosystem services, 32, 144-157.
Chen, Y. H. H., Paltsev, S., Reilly, J. M., Morris, J. F., & Babiker, M. H. (2016). Long-term
economic modeling for climate change assessment. Economic Modelling, 52, 867-883.
Davidoff, T. (2016). Supply constraints are not valid instrumental variables for home prices
because they are correlated with many demand factors. Critical Finance Review, 5(2),
177-206.
Huntington, H. G., Barrios, J. J., & Arora, V. (2019). Review of key international demand
elasticities for major industrializing economies. Energy Policy, 133, 110878.
Javan, A., & Zahran, N. (2015). Dynamic panel data approaches for estimating oil demand
elasticity. OPEC Energy Review, 39(1), 53-76.