Relationship b/w quantity demanded and total revenue of the firm depending on the elasticity of demand.pptx

1. Assignment Topic: Relationship b/w quantity demanded and
total revenue of the firm depending on the elasticity of
demand
Submitted To : IJAZ-UL-
HASSAN
Submitted By : ZOIA SADDIQUE
Class: BS(HONS) BAF
SECTION: CA-1201 D2 MORNING
Roll No. 0931-BH-BAF-2019

2. Demand:
“Demand is an economic principle referring to a consumer desire to purchase goods and
services and willingness to pay a price for a specific good or service.”
Elasticity of demand:
“The elasticity of demand is the change in demand due to the change in one or more of the
variable factors that it depends.”
“ In other words, it is the percentage change n quantity demanded divided by the
percentage in one of the variables on which demand depends.”
Ed= % change in quantity demanded / % change in one of variable on which it depends
Price elasticity of demand:
“ Price elasticity of demand is n economic measure of the change in the quantity demanded
or purchased of product in relation to its price change.”
Price elasticity of demand = % change in quantity demanded / % change in price
Types or degrees of elasticity of demand
There are five types of elasticity of demand:
1. Perfectly elastic demand:
The demand is said to be perfectly elastic if the quantity demanded increases infinitely (or by
unlimited quantity) with a small fall in the price or quantity falls to zero with a small rise in price
. Thus it is also known as infinite elasticity. It does not have practical importance as it is rarely
found in real life.

3. In the given figure ,price and quantity demanded are measured
along the Y-axis and X-axis respectively. The demand curve DD
is a horizontal straight line parallel to the X-axis. It shows that
negligible change in the price causes infinite fall or rise in the
quantity demanded.
2. Perfectly Inelastic demand:
The demand is said t be perfectly inelastic if the demand
demand remains constant whatever may be the price(I.e.price
may rise or fall). thus it is also called zero elasticity. It also
called zero elasticity . It is does not have practical importance
as it is rarely found in real life

4. In the given figure price and quantity demanded are
measured along the Y-axis respectively. The demand curve D
is a vertical straight line parallel to the Y-axis.it shows that the
demand remains constant whatever the price may be the
change in price. For example even after the increase in price
from P0 to P1 and fall in price from P0 to P1 the quantity
demanded remains atQ0.
3. Relative elastic demand or more than one:
The demand is said to be relative elastic if the % change in
demand is greater than the %change in price.i.e. if there is a
greater change in demand due to a small change in price.it is
also called highly elastic demand curve. For example if the
price falls 5% (say 10%) then it is a case of elastic demand.
The demand for luxurious goods such as car ,television
furniture etc is considered to be elastic.

5. In the given figure ,price and quantity demanded are measured
along the Y-axis and X-axis respectively .the demand curve DD
is more flat which shows that the demand is elastic. The small
fall in price from OP to OP1 has led to greater increase in
demand from OM to OM1 likewise demand decrease more
with small increase in price.
4. Relatively inelastic demand curve:
The demand curve is relatively said to be inelastic if the
% change in the quantity demanded is less then the %
change in the price. I.e. if there is a small change in
demand with a greater price change. It is also called less
elastic or simply elastic demand. For example when the
price falls by 10 % and the demand rises by less then 10
% (say 5 %) it is the case of inelastic demand. The
demand for for goods of daily consumption such as rise
salt etc is said to be inelastic.

6. In the given diagram price and quantity demanded are
measured along the Y-axis and X-axis respectively. The demand
curve DD is steeper which shows that the demand is lesser
elastic. The greater fall in price from OP toOP1 has led to small
increase in demand from OM to OM1 like wise greater increase
in price leads to small fall in demand.
5. Unitary elastic demand:
The demand is id to be unitary elastic if the % change n
quantity demanded is equal to % change in price. It is also
called unitary elasticity. In such type of demand , 1% change in
price leads to exactly 1% change in quantity demanded. This
type of is an imaginary one as it is rarely applicable in our
practical life.

7. In the given diagram price and quantity demanded are
measured along the Y-axis and X-axis respectively. The demand
curve DD is steeper which shows that the demand is lesser
elastic. The greater fall in price from OP toOP1 has led to small
increase in demand from OM to OM1 like wise greater increase
in price leads to small fall in demand.
5. Unitary elastic demand:
The demand is id to be unitary elastic if the % change n
quantity demanded is equal to % change in price. It is also
called unitary elasticity. In such type of demand , 1% change in
price leads to exactly 1% change in quantity demanded. This
type of is an imaginary one as it is rarely applicable in our
practical life.

8. depending on elasticity of demand :
Total revenue of the firm is dependent upon the sale of goods
and services. If the demand is high in the market the firm earn
more revenue and if the demand is lower the revenue is less of
the firm. The revenue of the firm is also dependent upon the
price of goods and services. In economics, the total revenue
test is a means for determining whether demand is elastic or
inelastic. If an increase in price causes an increase in total
revenue, then demand can be said to be inelastic, since the
increase in price does not have a large impact on quantity
demanded. If an increase in price causes a decrease in total
revenue, then demand can be said to be elastic, since the
increase in price has a large impact on quantity demanded.
Different commodities may have different elasticities
depending on whether people need them (necessities) or want
them (accessories).
Examples:

9.  Product A currently sells for $10. The seller decides to
increase the price to
$15, but finds that he ends up making less money. This is
because he is selling fewer of the product due to the
increased price, and his total revenue has fallen. The
demand for this product must be elastic.
Product A currently sells for $10. The seller decides to
increase the price to
$15, and finds that his revenue ends up increasing. The
demand for this product must be inelastic.

10. Mathematical explanation:
The mathematical link between them comes from the formula
of the price elasticity of demand:
Ed= [(Q2- Q1)] / (P2 - P1) X (P1 /Q1)
Where P stands for Price,Q for quantity demanded,(Q2 - Q1)
for change in quantity demanded, and (P2 - P1) for change in
price. Here the minus sign converts the result to a non-
negative number, as is conventional but not universal.
Using the idea of limits for infinitesimal changes in price and
therefore in quantity, the formula becomes
Ed = dQ / dP X P / Q
Total revenue is given by TR= P x Q
Since quantity demanded Q is a function of price P,Q =f (P)
total revenue can be rewritten as
TR = P x f (P)

11. The derivative of total revenue with
respect to P is thus dTR / dP
=1.f(P )+ P x f”(P)
But , Q = f (P) so, dTR / dP = f”(P) x P + Q
After both multiplying and dividing by , the equation
can be rewritten as: dTR / dP = Q(f”(P) x P/Q +1)
The last step is to substitute the elasticity of demand for -
f”(P) x P / Q to obtain: dTR / dP = Q(-Ed + 1) = Q (1 -
Ed )
To find the elasticity of demand using the mathematical
explanation of the total revenue test, it's necessary to use
the following rule:
If demand is elastic,Ed > 1 , then dR / dP < 0: price and total
revenue move in opposite directions. If demand is inelastic,Ed
< 1 , then dR/ dP > 0 : price and total revenue change in the
same direction. If demand is unit elastic,Ed = 1 , then dR / dP :
an increase in price has no influence on the total revenue.

12. Graphical explanation:
Total revenue, the product price times the quantity of the
product demanded, can be represented at an initial point by
a rectangle with corners at the following four points on the
demand graph: price (P1), quantity demanded (Q1), point A
on the demand curve, and the origin (the intersection of the
price axis and the quantity axis).

13. The area of the rectangle anchored by point A is the measure
of total revenue.
When the price changes the rectangle changes. The change in
revenue caused by the price change is called the price effect,
and the change In revenue in the opposite direction caused by
the resulting quantity change is called the quantity effect.
When the price changes from P1 to P2 the magnitude of the
price effect is represented by the rectangle P1P2C A and the
magnitude of the quantity effect is given by rectangle Q1Q2BC
The price effect is the loss of revenue from selling the original
quantity at the lower price; the quantity effect is the added
revenue earned at the new price on the newly induced units
sold.
So, if the area of the rectangle giving the price effect is greater
than the area of the rectangle giving the quantity effect,
demand is inelastic: Ed <1 If the reverse is true, demand is
elastic: Ed > 1 . If the sizes are equal, demand is unit elastic (or
unitary elastic).