Answer to Question #188335 in Microeconomics for Anima Irene

Question

Justina owns the just's sobolo store she charges 10cedis per bottle for her handmade sobolo . You , the economist calculated the elasticity of demand for sobolo in her town to be 2.5 . If she wants to increase her total revenue, what advice will you give her and why? Explain your answer

Answer 1

Elasticity is the degree to which consumers, individuals or producers tend to change their demand or the amount being supplied with respect to changes in price or income.

An elasticity of 2.5 indicates that the product is highly elastic.

When elasticity is greater than 1, a decrease in the price of the product would in turn lead to an increase in the amount of revenue.

Total Revenue = Price x Quantity

When elasticity is high, a small change in price would in turn lead to a large change in quantity being demanded. Hence, even a minor discount would help in boosting sales significantly.

If the seller needs raises the price, the revenue would fall drastically. Hence, she should in turn decrease the price.