For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit-elastic demand.
Total revenue decreases when price increases.
Demand is elastic. Consumers are highly responsive to changes in price. For a rise in price, the quantity effect (which reduces total revenue) outweighs the price effect (which increases total revenue). Overall, this leads to a fall in total revenue.
When price falls, the additional revenue generated by the increase in the quantity sold is exactly offset by the revenue lost from the fall in the price received per unit.
Demand is unit-elastic. Here, the revenue lost to the fall in price is exactly equal to the revenue gained from higher sales. The quantity effect exactly offsets the price effect.
Total revenue falls when output increases.
Demand is inelastic. Consumers are relatively unresponsive to changes in price. For consumers to purchase a given percent more, the price must fall by an even greater percent. The price effect of a fall in price (which reduces total revenue) outweighs the quantity effect (which increases total revenue). As a result, total revenue decreases.
Producers in an industry find they can increase their total revenues by working together to reduce industry output.
Demand is inelastic. Consumers are relatively unresponsive to price, so a given percent fall in output is accompanied by an even greater percent rise in price. The price effect of a rise in price (which increases total revenue) outweighs the quantity effect (which reduces total revenue). As a result, total revenue increases.
Question
For the following goods, is demand elastic, inelastic, or unit-elastic? Explain. What is the shape of the demand curve?
demand by a snake-bite victim for an antidote
Once bitten by a venomous snake, the victim’s demand for an antidote is very likely to be perfectly inelastic because there is no substitute and it is necessary for survival. The demand curve will be vertical at a quantity equal to the needed dose.
demand by students for blue pencils
Students’ demand for blue pencils is likely to be perfectly elastic because there are readily available substitutes, such as yellow pencils. The demand curve will be horizontal at a price equal to that of nonblue pencils.