How Are Changes In A Firm's Total Revenue Related To Its Product's Price Elasticity Of Demand?
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Price elasticity of demand is the sensitivity of the consumers to the changes in the prices of the products and the services. It is directly related with the changes in the total revenue of the company. In fact when the price elasticity of a product is inelastic, which means that |Ed| < 1, then there will be a small change in the quantity demanded as compare to prices. Therefore, the company can increase the prices to increase the revenues. Secondly, if the price elasticity of demand for a product is elastic and |Ed|> 1, then the consumers are very sensitive to the prices and a little change in price can lower the demand of goods. In such case if the company increases the prices then total revenue of the company decreases. On the other hand, if price elasticity of demand for a product is unitary which means that |Ed| = 1, then the revenues of the company will not change if the company changes the prices because change in demand is parallel to change in price but with equal proportion.
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