ECON 1B03 Chapter Notes - Chapter 5: Demand Curve, Luxury Goods, Margarine
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ECON 1B03 Full Course Notes
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Unit 3: the elasticity of demand and supply - objective 1: Suppose the local bus company finds itself faced with higher costs and unchanged revenues. It must somehow increase its revenue in order to meet its additional costs. Yes, it is possible, if the demand for public transportation is elastic. It is also possible that a rise in fares will decrease revenue, again if the demand curve happens to be elastic. The problem for the bus company is, therefore, to estimate the demand curve for public transportation and the elasticity of that demand curve within the appropriate price range. Only after the elasticity of demand is ascertained can a reasonable decision be made about changes in fares. If the demand curve is elastic, a reduction in fares would make sense, provided the increase in revenues covers the cost increase. If the demand is inelastic, a fare increase large enough for revenues to cover costs is probably the answer.