Skip to main content

What do you understand by price elasticity of demand? Analyse the relationship between price elasticity and marginal revenue.

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall.
PED is derived from the percentage change in quantity 
(%ΔQd) and percentage change in price (%ΔP).
PED is a measure of responsiveness of the quantity of a good or service demanded to changes in its price. The formula for the coefficient of price elasticity of demand for a good is:


The relationship between (Marginal Revenue) MR and Ed is that each measurement is important in managerial decisions on price and quantity. For example if a manager understands the elasticity of demand for its product, he or she will be able to make an informed decision on how consumers will react to a price increase or decrease. If the manager decides to raise the price of the product and demand for the product is elastic, consumers will likely purchase less of the product.

Formula

MR = Marginal Revenue
P = Price of the Good
Ed = Own Price Elasticity of Demand

MR = P * [ ( 1 + Ed ) / ( Ed ) ]

Formula Consequences

  • When Ed is between -∞ (exclusive) and -1 (exclusive), then demand is elastic, and the formula implies that MR is positive.
  • When Ed = -1, demand is unitary elastic, and the formula implies that MR is positive.
  • When Ed is between -1 (exclusive) and 0 (exclusive), demand is inelastic, and marginal revenue is negative.

Comments

Popular posts from this blog

Case Study: A perfect competition

In 1997, over $700 billion purchases were charged on credit cards, and this total is increasing at a rate of over 10 per cent a year. At first glance, the credit card market would seem to be a rather concentrated industry. Visa, MasterCard and American Express are the most familiar names, and over 60 per cent of all charges are made using one of these three cards. But on closer examination, the industry seems to exhibit most characteristics of perfect competition. Consider first the size and distribution of buyers and sellers. Although Visa, Mastercard and American Express are the choices of the majority of consumers, these cards do not originate from just three firms. In fact, there are over six thousand enterprises (primarily banks and credit unions) in the US that offer charge cards to over 90 million credit card holders. One person's Visa card may have been issued by his company's credit union in Los Angeles, while a next door neighbour may have acquired hers from a Miami …

What is the responsibility of business towards society? Why is social responsibility at a low pitch in India?

Responsibility of business towards society
A society consists of individuals, groups, organizations, families etc. They all are the members of the society. They interact with each other and are also dependent on each other in almost all activities. Thus, it has certain responsibilities towards society, which may be as follows:
to help the weaker and backward sections of the societyto preserve and promote social and cultural valuesto generate employmentto protect the environmentto conserve natural resources and wildlifeto promote sports and cultureto provide assistance in the field of developmental research on education, medical science, technology etc.
In other words, the responsibility of business towards society are:
Protection of environment.Better living conditions like housing, transport, canteen, crèches etc.Promotion of sports and culture.Opportunity for better career prospectsRegular supply of goods and servicesProper working conditions and welfare amenitiesGoods and services at…

Discuss the relationship between economics and management functions. How does the former contribute to the latter?

Economics and Management are ideal intellectual partners, each particularly fitted to strengthen and cross-fertilize the other. Economics provides the broader understanding of economic activity within which all organizations function; management in turn analyses the character and goals of that functioning. The management economics is often a subsection of the economic science and thus in broader sense a special form of the social, culture and Geisteswissenschaften. Like the economic science it is based in principle on the fact that most goods are limited and must by the participants be managed. It describes the economic functions of the enterprise within a national economy. In addition above all the optimal organization of the factors of production belongs apart from the company targets and the economical functions. In the broader sense also all households are enterprises.