(a) Define price elasticity of demand (b) Distinguish between elastic demand and Inelastic demand (C) Using diagrams. explain what happens to a traders tota...

Answer Details

(a) Price elasticity of demand (PED). It is the degree of responsiveness of the quantity demanded of a good to a change in its price. It is measured as \( PED = \dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} \).

(b) Elastic versus inelastic demand.

(c) Effect on a trader's total revenue. Recall \( TR = P \times Q \).

(i) When demand is elastic: a fall in price causes a more than proportionate rise in quantity demanded, so total revenue rises; a rise in price causes a more than proportionate fall in quantity, so total revenue falls. Price and total revenue move in opposite directions. On a diagram, plot a gently sloping (flat) demand curve; cutting price from \( P_1 \) to \( P_2 \) enlarges the revenue rectangle \( P \times Q \).

(ii) When demand is inelastic: a rise in price causes only a less than proportionate fall in quantity, so total revenue rises; a fall in price causes total revenue to fall. Price and total revenue move in the same direction. On a diagram, draw a steep demand curve; raising price from \( P_1 \) to \( P_2 \) enlarges the revenue rectangle.

Examination reminder: to raise revenue, cut price when demand is elastic but raise price when demand is inelastic.