Economics Micro & Macro (CliffsAP)

more money? The answer is no because not enough people will buy your product to increase your revenue. The price of
your product is too sensitive to a change in quantity demanded. For instance, if Marty’s marbles were found to be elas-
tic at 2.4 percent because he increased his prices by 1 percent, we can say that every time Marty raises his price by 1
percent his quantity demanded will decline by 2.4 percent.

We know that as long as demand is elastic, a firm must lower its price to increase total revenue, but by how much does
the firm lower its price? Well, we can find the answer on the demand curve. As the firm lowers its price, it leaves the
elastic region of the demand curve and enters the unitary elastic region. At this point, any further decreases in price will
lead to an inelastic result and revenue will fall. Firms must realize that when they are in the elastic range of the demand
curve, they must lower prices; when they are in the inelastic range of the demand curve, they can raise prices. Figure
7-3 illustrates the relationship between total revenue and demand. The demand curve has a downward slope where the
three regions of elasticity are illustrated. The total revenue curve has a point called the maximum point. This is the area
where firms’ revenues decline if surpassed.

Figure 7-3

Determinants of Price Elasticity of Demand

Different groups of consumers have different price elasticities for the same product. The degree to which the price elas-
ticity of demand is inelastic or elastic depends on these factors:

■ The existence of substitutes

■ The importance of the product relative to a consumer’s budget

■ The time period

QD

Maximum Point

Demand Curve

Total Revenue

Curve

Elastic Unitary Inelastic

Price

Quantity

Total Revenue

Part III: Microeconomics