Suppose you notice that when a particular firm raised the price of its product, its total revenue also increased. What does this imply about the price elasticity of demand for this firm’s product and wha factors may be influencing the elasticity?


Ans: It signifies that absolute value of price elasticity of demand is less than 1 and demand is inelastic.

With inelastic demand, a X% increase in price decreases quantity demanded by less than X%, so total revenue increases.

Inelastic demand may be caused by following factors.

(1) Low number of substitutes makes demand inelastic.

(2) In short run, demand is more inelastic, compared to in long run.

(3) If the good in question comprises a small portion of consumer budget, and

(4) If the good in question is a necessity good.

Economics

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