Question

1. Does an increase in price necessarily bring about higher total revenue? Explain. 2. Describe the different determinants of demand.

Answer 1

Question 1

The correct answer is: "FALSE".

The total revenue earned by a firm is computed using the formula:

R= price * quantity

According to the formula, if the term "price" increases, R would increase too. But an increase in price usually decreases the amount demanded by consumers of a certain product. Therefore, if quantity demanded drops in a higher proportion than the increase in price, the final total revenue would decrease. So the final effect depends on the size of the two variations.

Question 2

The determinants of demand are the following:

• Price: inversely related to the quantity demanded, as the larger the price the smaller the amount demanded of a product.
• Income of consumers: directly related. The larger the income earned by an economic agent, the larger the amount demanded of a normal good (there are exceptions, such as inferior goods, for which income and demand are inversely related).
• Prices of related goods of services. If two goods are substitutes, the increase on the price of one, decreases the amount demanded of that product but increases the amount demanded of the other product. It two goods are complements, the increase in the price of one good decreases the amount demanded of it, and the amount demanded of the other product too.
• Tastes or preferences of consumers.  If a product is in line with the general preferences of consumers the amount demanded will be large.
• Market expectations. For example, if a price is expected to rise, consumers might prefer to buy now and therefore demand increases at the moment.