ECO 1104 Lecture Notes - Midpoint Method, Blackboard
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ECO 1104 Full Course Notes
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Using elasticities to calculate a change in revenue. The example we discussed in class last evening concerns a website developer who is considering increasing the price of the firm"s services from to . The firm is presently selling 12 websites per month and obtaining revenue of ,400. Since revenue is simply price times output, we know that a higher price will tend to increase revenue. At the same time, we know that a higher price will reduce output, and a smaller output will tend to decrease revenue. The answer depends on the price elasticity of demand. If demand is elastic (i. e. , the elasticity value is greater than 1), then the percentage decrease in quantity demanded will be larger than the percentage increase in price, and revenue will fall. The opposite is true if demand is inelastic. Our example used a price elasticity of demand of 1. 8; in other words,