(a) Define price elasticity of demand
(b) Distinguish between elastic demand and Inelastic demand
(C) Using diagrams. explain what happens to a traders total revenue demand for his product is:
(i) elastic
(ii) inelastic
Explanation
a) Price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in its price
OR
Price of elasticity of demand = \(\frac { \text {%Change in quantity demanded}} {\text {%change in price}}\)
OR Price elasticity of demand = \(\frac {\bigtriangleup Q} {\bigtriangleup P}\) X \(\frac {\bigtriangleup P} {\bigtriangleup Q}\)
b) Distinguish between elastic demand and inelastic demand:
Demand is said to be elastic when price results in a more than proportionate change in quantity demanded. On the other hand, demand Said to be inelastic when a change in price results in a less than proportionate change in quantity demanded.
(c)(i) If demand for a trader's product is elastic, a fall in price will result in a more than proportional increase in quantity demanded. In such a case, the traders total revenue will increase. This is illustrated below.
Total Revenue before price fall = area of OP\(_{1}\) TQ\(_{1}\)
Total Revenue after price fall = area of OP\(_{2}\) RQ\(_{2}\)
(ii) If demand for a trader's product is inelastic. a fall in price will result in a less than proportionate increase in quantity demanded. In such a case, total revenue of the trader will fall as illustrated below
Total Revenue before price fall = area of OP\(_{1}\) SQ\(_{1}\)
Total Revenue after price fall = area of OP\(_{2}\) TQ\(_{2}\)
