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Alright, so now we know how to classify elasticities according to the value of the
elasticity, right? Let's go back and answer your question.
You increase the price of your product, in this case the sandwiches, by 10%.
Is that a good thing? Do you increase your sales or not?
And, again, two things can happen. And sometimes this diagram with arrows
work better. So, your total revenue, I will call it TR,
let's call that total revenue, of whatever you sell is going to be equal to two
parts. It's the price you charge times the
quantity of units you sell. Alright, that's your total revenue, and
that's what we're interested. We're trying to, we're trying to in some
way figure out if the price increase of your sandwich is going to increase you
total revenue. So we can say or to simplify this notation
here, let's put it right here in the middle.
We can say that the total revenue is going to be equal to P, which is the price,
times quantities. Two parts, price times quantity.
And then you're going to, let's say you increase the price, by 10%.
Well, two things could happen, or basically three things.
Your quantity will go down, for sure. But it could go down by exactly 10, by
less than 10 or by more than 10. And we know how to classify this.
Right? If it goes down by 5%, we know that this
is an inelastic demand. And in that case what's going to happen to
your total revenue? Well your total revenue clearly will go
up, because this arrow is actually larger than the down arrow and these go up.
This shouldn't be very difficult to come to understand, right?
If you increase your price by 10% and you don't lose a lot of customers, your
revenue goes up. So when you have an inelastic demand and
you increase your price, your revenue goes up.
Always, every time you have an inelastic demand if you know that the, that the
demand for your good is inelastic, you should increase the price to increase your
revenue. On the other hand, if you have a if you
decrease your price for an inelastic good, your, your revenue goes down, alright?.
So the revenue and, and, and the change in price go in the same direction.
Now the other alternative, right, is that you take your price, and once you increase
it by, let's say 10%, your quantity consumed actually goes down by a lot more
than that. Let's say it was improved by 15%.
Now in that case, what's going to happen to your total revenue?
Well, your total revenue will go down. This arrow is actually larger than that.
And what's happening here is that you're increasing your price, which is all well
and good. But you're losing so many customers then
the loss of customers are bringing your revenue down.
You're not, yeah, you're selling each sandwich at a higher price.
You're getting more revenue per sandwich, but you're not selling almost no
sandwiches compared to what you had before.
So your revenue from selling sandwich is actually lower than it was before then.
And, in this case here, this is a case where an elastic, right, because the
proportional change in, in I'm sorry, inelastic, because the proportional change
in quantities is lower than the proportional change in price.
And this is elastic because the proportional change in quantity is
smaller, is larger, than the proportional change in price.
So, if we want to kind of summarize all this stuff here, right, some statements,
we can say that if elasticity, is inelastic, then an increase in price
results in an increase in total revenue and vice versa, right?
And if E, the elasticity, is elastic, an increase in price will result in a
reduction in total revenue, because you lose too many customers compared to the
increase in the price and vice versa. And in the rare case that your elasticity
is equal to 1, its unitary, then your revenue stays the same.
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