Price/Income Elasticity of Demand
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November 26, 2011
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3 / 563
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So how can this number be used to decide whether to increase or decrease price while still increasing a company’s revenue? It all depends on the demand curve.
Once the price elasticity of demand is calculated, it can be placed on the demand curve and compared to different ranges of values to determine what would happen with an increase or decrease in price...
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For example, if elasticity is >1 (infinite elasticity), the demand curve would be nearly horizontal and small changes in price would have a large impact on quantity demanded. Should the elasticity be <1 the demand curve would be nearly vertical and a change in price would have no effect on demand. Therefore, an increase in price would result in an increase in revenue and vice versa...
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