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From the given table, the total revenue can be determined by multiplying the price with quantity. It is summarized as below.
Price elasticity of demand determines the responsiveness of demand to changes in price. As we know that when the percentage change in demand is greater than the percentage change in price, the demand is elastic and if otherwise, the demand is inelastic. The graph below shows the demand elasticity and revenue curves, wherein quantity is taken as the x-axis and price/total revenue is taken as the y-axis.
The relationship between price elasticity of demand and total revenue is very important. In the above table, let us consider the price elasticity of demand of a price change from $7 per unit to $6 per unit. The percentage change in demand is 100% following a 14.29% change in price thus resulting in an elasticity of demand of -7, which is highly elastic. Hence in such a case where the demand is price elastic, a fall in price levels results in higher total revenues. Now, if we consider the price change further down the demand curve from $2 per unit to $1 per unit, the percentage change in demand is 16.67% following a 50% fall in price resulting in a -0.333, which is inelastic. A fall in price when the demand is price inelastic results in a reduction of total revenue. Thus as price falls, the total revenue initially increases and later decreased and the maximum revenue of $16,000 is incurred at a price of $4 per unit when 4000 units are sold. Let us see the different impacts of the changes in the market on total revenues in the above case.
In the above graph, the equilibrium price, Po and quantity, Qo is $4 and 4000. A decrease in the number of buyers will cause a decrease in demand resulting in a leftward shift of the demand curve. Since there will be a surplus of quantity supplied, the situation will push down the price and when the price falls, the surplus is eliminated and the resulting equilibrium quantity decreases. Hence a decrease in demand will decrease the equilibrium price and quantity.
An increase in supply can be caused by advancement in technology. This shifts the supply curve to the right creating a production surplus, which will again push down the price. The lower price will get rid of the surplus and the equilibrium quantity increases. Hence an increase in supply results in a lower price but higher equilibrium quantity.
When both occur simultaneously, both the demand and supply curves shift as mentioned above. Since both the conditions lower the equilibrium price (buyers are ready to pay less and sellers charge less), the equilibrium price will fall to a greater extent. Demand shift leads to a smaller equilibrium quantity and supply shift leads to a larger equilibrium quantity. Hence without exact numbers, it is not possible to determine if the new equilibrium quantity is the same as before, but there are possibilities for it to remain constant. But in our example, equilibrium quantity remains constant and the equilibrium price alone decreases to $3 per unit, as shown below.
However, the decrease in equilibrium quantity owing to demand decrease and the increase in equilibrium quantity owing to supply increase need not be equal thus resulting in the same equilibrium quantity. Hence when there is a simultaneous decrease in demand and an increase in supply, the equilibrium price reduces drastically and the equilibrium quantity may not be predicted.
As we know, a complementary good is one that is jointly consumed with another good. Hence there is an inverse relationship between a change in price for one good and the demand for the other complementary good. DVDs and DVD players are complementary. When there is an increased consumption of DVD players, there will be a greater demand for DVDs and vice versa. When there is a reduction in the price of DVD players, there will be an increased consumption of DVD players owing to increased demand, thus resulting in an increased demand for DVDs as well. Hence the demand curve shifts right since the new DVD player owners will buy additional DVDs to those who already own players and buy DVDs. Hence a reduction in the price of DVD players will increase the demand for DVDs shifting the demand curve to the right as shown below.