This preview shows page 1. Sign up to view the full content.
Unformatted text preview: percentage change of quantity, so when the price rises (falls) for example, the rise (fall) of price leads to a even larger the drop (rise) in quantity, as a result, the total revenue, which is a product of price and quantity, decreases (rises). A mathematic explanation is as following: R: revenue P: price Q: quantity e: elasticity P e R P P P Q R P Q R P dP Q dQ R dR QdP PdQ dR PQ R + = + = + = + = + = = )% 1 ( % % % % % % % % % The last step arrives based on the definition of elasticity: P Q e = % % Therefore, in the last equation, P e R + = )% 1 ( % For inelastic demand, -1< e <0, so (e+1) is positive. Therefore, R % and move towards the same direction. P % For elastic demand, e < -1, so (e+1) is negative. Therefore, R % and move towards the opposite direction. P %...
View Full Document
- Fall '07