Demand Curve Elasticity Explained
The relationship between price elasticity of demand, marginal revenue (MR), and average revenue (AR) is crucial for understanding firm behavior.
Marginal Revenue and Elasticity Relationship
The elasticity of a demand curve is directly linked to the sign of the marginal revenue:
- Elastic Demand: When the demand curve is elastic, a decrease in price leads to an increase in total revenue. This happens when marginal revenue (MR) is positive. In this range, quantity demanded changes proportionally more than price.
- Inelastic Demand: When the demand curve is inelastic, a decrease in price leads to a decrease in total revenue. This occurs when marginal revenue (MR) is negative. Here, quantity demanded changes proportionally less than price.
- Unit Elastic Demand: When demand is unit elastic, a change in price results in no change in total revenue. This corresponds to marginal revenue (MR) being zero.
Analyzing Revenue Conditions
Average revenue (AR) typically equals the price of the good, which is generally positive. While AR is related to the demand curve itself (AR = Price), the sign of MR is the direct indicator of elasticity in the relevant range.
- The demand curve is elastic when marginal revenue has a positive value.
- The demand curve is inelastic when marginal revenue has a negative value.
Therefore, the demand curve is elastic when marginal revenue has a positive value and inelastic when marginal revenue has a negative value.
Similar Questions
- The sum of total fixed cost and total variable cost is known as:
- The law of comparative advantage is popularly attributed to ________.
- A Giffen good is related to which of the following?
Which of the following is an example of structural unemployment?
- ______ in economics is a curve that, when plotted on a graph, shows all the combinations of two factors that produce a given output.
- Which among the following organisations is the best example of an agreement between oligopolists?
- The curve that shows the levels of output that a profit maximising firm would choose to produce at different values of the market price is called the firm's ______.
- When a proportional increase in all input results in an increase in output by a larger proportion, the production function is said to display ______.
- Complete the sentence using the options given below.
The short-run marginal cost curve is 'U'-shaped due to ______. - The Total Revenue Curve of a firm shows the relationship between the _______ made by the firm and the output level of the firm.
Important Questions from Microeconomics
Which of the following statement is correct?
I. Indifference curves are sloping from left to right.
II. Higher indifference curve gives a higher level of utility.
Match List I with List II:
List- I
Shape of revenue curve of the firm
List – II
Market structure
A.
Kinked revenue-curve (I)
Monopolistic competition B.
Infinitely elastic straight line curve (II)
Perfect competition C.
Relatively less elastic curve (III)
Oligopoly D.
Relatively high elastic curve (IV)
Monopoly.
Choose the correct answer from the options given below -Marginal revenue of a firm is constant throughout under _________.
The cost curve which is a rectangular hyperbola is:
Rare of inflation is equal to:
[A = Price Index]
