With an appropriate illustration, explain the circumstance in which an increase in output of a producer would
(a) decrease his sales revenue [10 marks]
(b) increase his sales revenue [10 marks}
Explanation
(a) An increase in output would decrease the sales revenue of a producer where demand is price inelastic.
The explanation is as follows
(i) An increase in output, given demand, will reduce the price and increase the quantity demanded.
(ii) If demand is price inelastic,
the increase in the quantity demanded will be
proportionately smaller than the reduction in the price
(iii) Therefore sales revenue will decrease.
Illustration
A 40% fall in price is matched by a 10% increase in quantity demanded i e. demand is price inelastic.
| Period | Price $ | Quantity Demanded | Sales Revenue $ |
| 1 | 100 | 500 | 50,000 |
| 2 | 60 | 550 | 33,000 |
OR
(b) An increase in output would increase the sales revenue of a product where the demand for the product is price elastic. The explanation is as follows:
(i) An increase in output, given demand, will reduce the price and increase the quantity demanded.
(ii) If demand is price elastic, the increase in the quantity demanded will be proportionately greater than the reduction in price.
(iii) Therefore sales revenue will increase.
Illustration
A 10% fall in price matched by a 400/0 Increase In quantity demanded i.e demand is price elastic.
| Period | Price $ | Quantity Demanded | Sales Revenue $ |
| 1 | 100 | 500 | 50,000 |
| 2 | 90 | 700 | 63,000 |
