Economics AS’Level(PED and Total Revenue/Total Expenditure)

Summary

The discussion focuses on the relationship between price elasticity of demand (PED), total revenue, and total expenditure. For inelastic products, an increase in price leads to higher total revenue and total expenditure, as consumers continue to buy despite price changes. Conversely, for elastic products, price increases result in decreased total revenue and expenditure because consumers stop purchasing. The dialogue emphasizes understanding these dynamics to grasp how pricing affects both consumer spending and business revenue, highlighting the critical distinctions between elastic and inelastic demand.

Takeaways

• 😀 Price elasticity of demand (PED) measures how total revenue changes with price adjustments.
• 😀 If a product is inelastic, increasing the price will lead to higher total revenue.
• 😀 For inelastic products, consumers continue to buy despite price increases.
• 😀 Total revenue is calculated as price multiplied by quantity sold.
• 😀 For elastic products, increasing the price causes total revenue to decrease.
• 😀 Elastic demand means consumers are sensitive to price changes and may stop buying if prices rise.
• 😀 Total expenditure represents what consumers are willing to spend on a product.
• 😀 When total revenue increases for inelastic products, total expenditure also increases.
• 😀 Conversely, when total revenue decreases for elastic products, total expenditure also decreases.
• 😀 The formula for PED is the percentage change in quantity demanded divided by the percentage change in price.

Q & A

What is price elasticity of demand (PED)?

Price elasticity of demand measures how the quantity demanded of a product changes in response to a change in its price.

What happens to total revenue when the price of an inelastic product increases?

When the price of an inelastic product increases, total revenue also increases because consumers will continue to buy the product despite the higher price.

How is total revenue calculated?

Total revenue is calculated by multiplying the price of a product by the quantity sold.

What characterizes a product with elastic demand?

A product with elastic demand is one where an increase in price leads to a decrease in the quantity demanded, resulting in a decrease in total revenue.

What is the relationship between total expenditure and total revenue?

Total expenditure reflects how much consumers are willing to spend on a product, while total revenue is the income producers earn from selling it. Both are affected by changes in price and quantity sold.

How do total revenue and total expenditure change when a product is elastic?

For an elastic product, if the price increases, total revenue decreases and total expenditure also decreases, as consumers buy less.

What is the effect on total expenditure when the price of an inelastic product increases?

When the price of an inelastic product increases, total expenditure increases as consumers continue to buy the product at the higher price.

What formula is used to calculate PED?

The formula for price elasticity of demand (PED) is the percentage change in quantity demanded divided by the percentage change in price.

What is the significance of knowing whether demand is elastic or inelastic?

Understanding whether demand is elastic or inelastic helps businesses set prices effectively, predict changes in total revenue, and make informed production decisions.

Can you summarize the overall relationship between PED, total revenue, and total expenditure?

In summary, if demand is inelastic, increasing price leads to increased total revenue and total expenditure. Conversely, if demand is elastic, increasing price results in decreased total revenue and total expenditure.