ECON 101 Lecture 5: Economics101-Lecture 5- Caldwell
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ECON 101 Full Course Notes
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Document Summary
When a seller raises the price of a good, there are two countervailing effects in action (except in the rare case of a good with perfectly elastic or perfectly inelastic demand) A price effect: after a price increase, each unit sold sells at a higher price, which tends to raise revenue. A quantity effect: after a price increase, fewer units are sold, which tends to lower revenue. If demand for a good is elastic (less than -1): The quantity effect is stronger than the price effect. An increase in price reduces total revenue. If demand for a good is inelastic (between 0 and -1): The price effect is stronger than the quantity effect. An increase in price increases total revenue. If demand for a good is unit elastic (exactly -1) The quantity effect and price effect exactly offset each other. An increase in price does not change total revenue.