Question

On my note, I have

"When TR is rising, Ed is greater than 1; TR falling, Ed is smaller than 1; maximizing TR point, Ed is equal to 1"

"

• If firm lowers price it sells more output

  • If Ed is smaller than 1 (inelastic demand); TR decreases

  • If Ed is greater than 1 (elastic demand); TR increases"

I don't understand how profit maximization has anything to do with Ed. Thx for ur help

Answer 1

The elasticity of demand is related to the total revenue. how does the TR respond to the change in price depends on the elasticity of demand.

As long as the elasticity of demand is greater than the one, it would be an appropriate policy to reduce the price and raise the level of TR. one percent decrease in price would cause more than one percent rise in output or demand. hence TR would rise in such a situation or condition.

TR is maximum when MR is zero. And MR is zero where the elasticity of demand is unity or one.

When Ed is less than one, it means if the price is decreased by the one percent, demand would rise less than one percent. Hence, there would be a fall in TR.