Economics – Differing objectives and policies of firms | e-Consult
Differing objectives and policies of firms (1 questions)
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Explanation:
If the demand curve is relatively inelastic in the £20-£25 price range, this means that the quantity demanded will not change significantly in response to a price change. In other words, the absolute value of the price elasticity of demand will be less than 1.
Reasoning:
- Current Total Revenue: £20 x 200 = £4000
- New Quantity Demanded (at £25): Because demand is inelastic, the quantity demanded will likely fall by a small percentage. Let's assume, for the sake of illustration, that the quantity demanded falls to 180 units.
- New Total Revenue: £25 x 180 = £4500
Conclusion:
In this scenario, the firm is likely to experience an increase in total revenue. Although the price has increased, the quantity demanded has not decreased by a large enough amount to offset this. The inelastic demand means that consumers are still willing to buy a relatively similar quantity of the product, even at the higher price. Therefore, the increase in price leads to a higher total revenue.