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Price elasticity of supply and total revenue

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Price elasticity of supply and total revenue

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Regardless of price elasticity of supply, when price increase, total revenue increase due to the positive relationship between price and quantity supplied. More price means more quantity supplied and that means more revenue.

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Time here refers to the amount of time given to the producers to react to a change in demand
The longer the time, the more price elastic the supply is. Time can be classified as immediate supply, short run supply and long run supply.
Immediate supply occurs when the demand increases without a warning. Producers are unable to increase their production in such a short time frame. The supply curve is perfectly inelastic and is vertical.
Short run supply occurs when the producers are given a short period of time (but longer than immediate supply) to adjust to the change in demand. Producers have some time to vary only some resources to produce slightly more goods. The supply curve is inelastic and steep
Long run supply occurs when the producers are given a long period of time to adjust to a change in demand. Producers have a lot of time to vary their resources so as to produce more goods. The supply curve is elastic and gentle.

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The more common the input material is, the more price elastic the supply is.

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Determinants of price elasticity of supply

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Determinants of price elasticity of supply

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Two factors determine the price elasticity of supply. They are resource substitution possibilities and time

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Coefficients of price elasticity of supply

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Coefficients of price elasticity of supply

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The price elasticity of supply is elastic if the coefficient is greater than 1. This means a 1% change in price will change the quantity supplied by more than 1%
The price elasticity of supply is inelastic if the coefficient is lesser than 1. This means a 1% change in price will change the quantity supplied by less than 1%.
The price elasticity of supply is unit-elastic if the coefficient is equal to 1. This means a 1% change in price will change the quantity supplied by 1%.
The price elasticity of supply is perfectly elastic if the coefficient is infinity. This means a 1% change in price will cause an infinite change in quantity supplied.
The price elasticity of supply is perfectly inelastic if the coefficient is 0. This means no matter how large the price change is, the quantity supplied does not change

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The price elasticity of supply measures how significant the quantity supplied of a product change as price change
Price elasticity of supply = (Percentage change in quantity supplied)/(Percentage change in price)
Also note that
Percentage change in quantity supplied = (New quantity supplied - Old quantity supplied)/0.5(New quantity supplied + Old quantity supplied)
Percentage change in price = (New price - old price)/0.5(New price + old price)

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Coefficients of cross price elasticity of demand

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Coefficients of cross price elasticity of demand

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If the coefficient of the cross price elasticity of demand is positive, the two goods are substitutes in consumption.
If the coefficient of the cross price elasticity of demand is negative, the two goods are complements in consumption
If the coefficient of the cross price elasticity of demand is 0, the two goods are not related.

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The measure of how significant the quantity demanded of a product change when the price of other goods change.
Cross price elasticity of demand = (Percentage change in quantity demanded)/(Percentage change in price of other goods)
Also note that
Percentage change in quantity demanded = (New quantity demanded - Old quantity demanded)/(Old quantity demanded)
Percentage change in price of other good = (New price of other good - Old price of other good)/(Old price of other good)

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Coefficients of income elasticity of demand

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Coefficients of income elasticity of demand

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The concept of income elasticity of demand measures the horizontal shift of the demand curve in response to a change in income.
The coefficients of the income elasticity of demand tells whether or not the product is normal or inferior
If the coefficient of the income elasticity of demand is negative, it shows that the product is an inferior good. This is because there is a negative relationship between quantity demanded and income.
If the coefficient of the income elasticity of demand is positive, it shows that the product is a normal good. This is because there is a positive relationship between quantity demanded and income.
Normal goods can be classified into luxury goods or necessity goods.
If the coefficient of income elasticity of demand is positive and less than 1, it is a necessity. When the income change, it does not significantly impact the quantity demanded of the goods
If the coefficient of income elasticity of demand is positive and more than 1, it is a luxury. When the income change, it significantly impact the quantity demanded of the goods.

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The measure of how significant the quantity demanded of a product change when the income change.
Income elasticity of demand = (Percentage change in quantity demanded)/(Percentage change in income)
Also note that
Percentage change in quantity demanded = (New quantity demanded - Old quantity demanded)/(Old quantity demanded)
Percentage change in income = (New income - Old income)/(Old income)

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Luxury products have demand that is price elastic and necessity products have demand that is price inelastic. This is because luxury products are wants, not needs. Therefore, it is fine to not have these products and that is why consumers may consider not buying the product if its price increase
On the other hand, necessity products are needs. Consumers have no choice but to still buy the product even if its price increase.

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Time here refers to the amount of time available for the consumer to make their decision
If the time available for the consumer to make their decision is short, the demand for the product is price inelastic. The reason is because if the price of a product increase and you are given only a short period of time to decide whether or not you should buy the product, you would usually not hesitate to buy the same product due to time constraint. However, if you are given a long period of time to decide, you would have enough time to consider whether or not you should purchase substitute products. Also, as time passes by, new substitute products may be created. Hence, if there is more time for consumers to decide, the demand for the product is price elastic

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If the amount of money spend on the product takes up a small proportion of your budget, the demand for the product is price inelastic and vice versa. Reason being because if the price of buying a good takes up a small proportion of your budget, it is relatively cheap and an increase in price won't usually affect our purchasing power.

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The more and closer the substitutes to a product, the more price elastic the demand of the product is and vice versa
This is because if there are substitutes available, some people would switch to purchasing the substitute product when the price of the product increases; if there are no substitutes available, even if price increase, consumers have no choice but to still use the same product
Note that the availability of substitutes depend on how you define the product. If the definition is broad and general, there are fewer substitutes. (e.g. food). If the definition is narrow and specific, there are more substitutes (e.g. the substitute of rice is potatoes, pasta, noodles etc.)
In short, the demand for a specific and narrow defined goods is price elastic and vice versa.

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Determinants of price elasticity of demand

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Determinants of price elasticity of demand

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Availability of substitutes

Share of budget spend on the product

Time

Luxury or necessity

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Relationship between price elasticity of demand and total revenue along a negatively sloped linear demand curve

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Relationship between price elasticity of demand and total revenue along a negatively sloped linear demand curve

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The total revenue is the maximum when price elasticity is unit, or equal to 1.
This is because, above the mid-point, the demand is elastic, and if it is elastic, an decrease in price will increase the total revenue
Below the mid-point, the demand is inelastic, meaning an increase in price will increase the total revenue.
What about on the mid-point? That would be the maximum point because the price (if above the mid-point) will decrease in order to increase revenue and the price (if below the mid-point) will increase in order to increase revenue. So when it reaches the mid-point, it should be the maximum.

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Knowing the principle of price elasticity of demand can help a firm maximise its total revenue
Note that
Total Revenue = Price * Quantity Demanded
Since quantity demanded and price are inversely related, an increase in price will result in a decrease in quantity demanded, but the implication on total revenue can only be determined based on the price elasticity of demand. The firm can decide, based on the price elasticity of demand, whether or not they should increase the price or decrease the price to maximise total revenue
If demand is price elastic, a 1% change in price will cause a change in quantity demanded of more than 1%. Doing some simple calculation, a 1% decrease in price will cause an increase of more than 1% of quantity demanded, which in turns, increase the total revenue. On the other hand, a 1% increase in price will cause a decrease of more than 1% of quantity demanded, which in turns, decreases the total revenue
If the demand is price inelastic, a 1% change in price will cause a change in quantity demanded of less than 1%. Doing some simple calculation, a 1% decrease in price will cause a quantity demanded increase of less than 1%. This in turns decrease total revenue. On the other hand, a 1% increase in price will cause a quantity demanded decrease of less than 1%. This in turns increase total revenue.
If the demand is unitary elastic, a 1% change in price will cause a 1% change in quantity demanded, which does not change the total revenue regardless of price.
In summary, in the case of price elasticity, a decrease in price will in turn increase the total revenue and vice versa. An increase in total revenue occurs for a price inelasticity situation when price increase and vice versa. Regardless of price, total revenue remains constant for unitary elasticity situation

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Coefficients of price elasticity of demand

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Coefficients of price elasticity of demand

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The coefficient, or value, of price elasticity of demand can range from zero to infinity, depending on how significant a change in price affect the quantity demanded.
Elastic demand occurs when a 1% change in price cause a change in quantity demanded of more than 1%. In other words,
Percentage Change in Quantity Demanded > Percentage Change in Price
The gradient of the demand curve is gentler. This shows that a change in price will cause a significant change in quantity demanded.
On the other hand, inelastic demand occurs when a 1% change in price cause a change in quantity demanded of less than 1%. In other words
Percentage Change in Quantity Demanded < Percentage Change in Price
The gradient of the demand curve is steeper. This shows that a change in price will cause an insignificant change in quantity demanded.
Unitary elastic demand is a situation where a 1% change in price cause a 1% change in quantity demanded. In other words
Percentage Change in Quantity Demanded = Percentage Change in Price
In this case, the quantity demanded and price change proportionally and the demand curve is shaped like a hyperbola.
A perfectly elastic demand occurs when a 1% change in price cause an infinite change in quantity demanded
Percentage Change in Price = 0
Any change in price will cause the quantity demanded to fall to 0 and the demand curve is a horizontal straight line. This is because an unlimited amount of product is demanded at that one price.
A perfectly inelastic demand occurs when a price change does not change the quantity demanded.
Percentage Change in Quantity Demanded = 0
A change in price does not change the quantity demanded
The demand curve of a perfectly inelastic demand is a vertical straight line.
Constant elasticity is a situation where the coefficient of price elasticity of demand remains the same regardless of the points taken into consideration. Constant elasticity occurs only when the demand is unit elastic, perfectly elastic or perfectly inelastic.
In a linear negatively sloped demand curve, elasticity will change depending on the points used to calculate the price elasticity of demand
Above the mid-point of the linear negatively sloped demand curve, the demand is elastic
On the mid-point of the linear negatively sloped demand curve, the demand is unit elastic
Below the mid-point of the linear negatively sloped demand curve, the demand is inelastic

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A measure of how significant does the quantity demanded change when the price of the good itself change.
Since this is a change in its own price, we will look at a movement along the same demand curve when price changes.

Price Elasticity of Demand = |(Percentage Change in Quantity Demanded)/(Percentage Change in Price)|
Note that since the law of demand states that price and quantity demanded is inversely related, the price elasticity is always negative. The absolute value helps us change the number into a positive one.
Also note that
Percentage Change in Quantity Demanded = (New quantity demanded - Old quantity demanded)/0.5(New quantity demanded + Old quantity demanded)
Percentage Change in Price = (New price - Old price)/0.5(New price + Old price)

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A measure of how significant does the quantity demanded change when the price of the good itself change, income change or when the price of other goods change