Answer to Question #218037 in Microeconomics for SANDILE

Question

As a Production Manager of a manufacturing firm that produces both an elastic good and an inelastic good, illustrate to a new board of the organisation the relationship between price elasticity of demand and total revenue, and how the elasticity concept can be used to maximise revenues of both commodities? Illustrate your answer using relevant diagrams of elastic and inelastic goods.    

Answer 1

Inelastic supply tends to involve a price change that results to a smaller proportional quantity supply change. However, elastic supply is the price change that results to a bigger proportional supply change.

When a manufacturing company producing inelastic and elastic goods chooses on increasing total revenue, the firm needs to minimize elastic goods' price and raise inelastic good's price.

When the demand becomes elastic at respective price level, minimizing the price by respective percentage may lead to more higher percentage increase in quantity sold, increasing general income.