Question

Suppose that Victoria and her friends are running a fundraiser by selling donuts. They want to know what will happen to their revenue if they increase the price of each donut from $0.80 to $1. What concept do they need to apply to find out their expected revenue

Answer 1

Answer:

price elasticity of demand

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price  

Price elasticity of demand = midpoint change in quantity demanded / midpoint change in price  

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.  

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded.

If this change in price (a 25% increase) leads to a 50% decrease  in quantity demanded, demand is elastic and revenue would fall if price is increased

If this change in price (a 25% increase) leads to a 10% decrease  in quantity demanded, demand is inelastic and revenue would increase if price is increased