Economics – The allocation of resources - Price changes | e-Consult
The allocation of resources - Price changes (1 questions)
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This situation, where the quantity demanded falls by a smaller percentage than the price increases, suggests that the product is relatively inelastic.
- Law of Demand: The law of demand states that as the price of a good increases, the quantity demanded decreases. However, the magnitude of this decrease can vary.
- Inelastic Demand: When demand is inelastic, consumers are not very responsive to price changes. This can be because:
- The product is a necessity (e.g., medicine).
- There are few close substitutes available.
- The product represents a small proportion of the consumer's budget.
- Impact on Total Revenue: Because the quantity demanded changes by a smaller percentage than the price, the total revenue will increase. The increase in price outweighs the decrease in quantity.
For example, if the price increases by 10% and the quantity demanded falls by only 5%, total revenue will increase.
In summary: The fact that quantity demanded falls by a smaller percentage than price increase indicates inelastic demand. This occurs when consumers are not very responsive to price changes, leading to an increase in total revenue when the price rises.