Answer to Question #207740 in Microeconomics for SDA

Question

  ‘‘Gaining extra revenue is easy for any producer—all it has to do is raise the price of its product.’’ Do you agree? Explain when this would be true and when it would not be true.

Answer 1

Solution:

I do not agree with this statement.

This is because raising prices does not always guarantee increased revenues. It can easily backfire and result in massive losses for the producer.

 

It can be true in some instances especially when the producer deals with goods that have inelastic demand. This is because with such goods raising their prices will result in a smaller percentage decrease in the quantity sold and total revenue will increase. These can be necessities which consumers will still purchase despite the price increase.

 

The statement will not be true when the producer is dealing with goods that have an elastic demand. This is because with such goods raising their prices will result in a larger percentage decrease in the sold and total revenue will decline. These can be luxury goods that are very sensitive to price changes and consumers will stop purchasing them if their prices increase. In order to increase revenue for such products, the producer can reduce their prices.