G. The given figure above shows the elasticity along the demand curve. Elasticity coefficients along a linear demand curve can be separated into three classifications with respect to their numerical values. Demand is said to be elastic when elasticity is greater than one (From 6 to 10), unit elastic when elasticity is equal to one (From 10 to 8) and inelastic when elasticity is less than one (from 6 to 36).
G1. When demand is elastic, a price decrease will lead to an increase in total revenues since the percentage increase in quantity demanded is greater than the percentage decrease in price. As shown in the given graph below. Similarly, if demand was inelastic for such a price decrease, the decline in quantity demanded would be proportionately greater than the price increase, and producers’ total revenue would decrease. Perfectly elastic demand means that as price falls, total revenue is the same.
Knowing what the price elasticities of demand are for a good is extremely important to producers. Before producers raise the price of their product, they would like to know if sales or total revenues would rise, drop just a little or whether sales will completely drop. A firm’s total revenue is equal to price multiplied by quantity sold. An increase in price may raise total revenues because each output is now sold for at a higher price but it also may reduce revenues because quantity sold falls. The net effect of a price change on total revenues therefore depends on whether the change in quantity demanded is relatively larger or smaller than the change in price.
NOTE:
As requested, I’ve included a brief discussion on the effect of reduction of price to quantity demanded within the elastic range on the 1st sentence in G1.
However, elasticity can be best described with the effect of increase in price of a certain commodity. As you observe in the market, prices of goods and commodities do not really go down. There may be discounts or promos but prices do not go down. Inflation should not have been a problem if prices could be decreased.
