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Microeconomics

a. What is the definition of price elasticity of demand?

b. Explain the relationship between price elasticity and total revenue? How does price elasticity of demand affect a firmâ??s pricing decisions?

c. How does the availability of substitutes affect price elasticity of demand? Provide examples. Please relate the concepts to your personal experience and/or professional experience

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1. What is the definition of price elasticity of demand?

Price elasticity of demand (ped) measures how responsive the consumers are to price changes, in percent terms. A ped of 2 indicates that when price goes up by x%, demand goes down by 2x% (the reverse is also true); a ped of 0.5 indicates that when price goes up by x%, demand goes down by 0.5x%.

2. Explain the relationship between price elasticity and total revenue? How does price elasticity of demand affect a firm's pricing decisions?

When the demand of a particular good is elastic (i.e. ped > 1), consumers are said to be very responsive to price changes. In this case, firms may increase revenue by ...

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Microeconomics

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