PED

• What is the relationship illustrated between price elasticity of demand and total revenue?


  The relationship shows how total revenue can be maximized based on price elasticity of demand.
• What diagrams are needed to illustrate the relationship between price elasticity of demand and total revenue?

  • A demand curve that is price elastic
  • A demand curve that is price inelastic
• What should be labeled on the axes of the demand curve diagram?

  Price on the y-axis and quantity on the x-axis.
• How should a firm respond when demand for a product is price elastic?

  A firm should reduce the price to increase total revenue.
• What happens to quantity demanded when the price is reduced in a price elastic demand scenario?

  Quantity demanded increases proportionately more than the price decrease.
• What is the formula for initial total revenue in the price elastic demand scenario?

  Initial total revenue is equal to $P1 \times q1$.
• What is the formula for new total revenue after a price reduction in the price elastic demand scenario?

  New total revenue is equal to $P2 \times q2$.
• How do you illustrate revenue gains and losses in the price elastic demand scenario?

  By showing the revenue gain as a green box and the revenue loss as a red box on the diagram.
• What should a business do when demand for a product is price inelastic?

  A business should raise the price to increase total revenue.
• What happens to quantity demanded when the price is increased in a price inelastic demand scenario?

  Demand decreases proportionately less than the price increase.
• What is the formula for initial total revenue in the price inelastic demand scenario?

  Initial total revenue is equal to $P1 \times q1$.
• What is the formula for new total revenue after a price increase in the price inelastic demand scenario?

  New total revenue is equal to $P2 \times q2$.
• How do you illustrate revenue gains and losses in the price inelastic demand scenario?

  By showing the revenue gain as a green box and the revenue loss as a red box on the diagram.
• What checklist should be followed when drawing the diagrams for price elasticity of demand and total revenue?

  • Label the axes (price and quantity)
  • Label the curves (elastic and inelastic)
  • Label the equilibrium prices and quantities
  • Show and label revenue gains and losses
• What is the importance of labeling in the diagrams for price elasticity of demand?

  Labeling helps clarify the relationship between price changes and total revenue effects.