A2.02.04: PED and TR

Question 1

What is the relationship between price elastic products and total revenue?

Answer 1

Inversely proportional relationship:
* as prices increase, total revenue falls
* as prices decrease, total revenue increases

Question 1

What is the relationship between price inelastic products and total revenue?

Answer 1

Directly proportional relationship:
* as prices increase, total revenue increase
* as prices decrease, total revenue decreases

Question 2

Why is determining PED important for governments too?

Answer 2

• Taxes on products and elasticity will impact firms’ revenues; If demand falls, less workers are needed
• Therefore, governments will put taxes on inelastic goods