Question

Show the relationship between the elasticity of demand for a firm’s product and its marginal revenue. Try these problems: 4, 14

Short answer

If demand is elastic $(e>-1)$, it will respond well to a price reduction, increasing revenue.

Step-by-step solution

Introduction

The elasticity of demand displays the link between price and the quantity required as well as allows for a detailed evaluation of the effect of a price change on the quantity demanded. Firms often stop manufacturing when marginal revenue drops below marginal costs. A low-cost lead operates the scarce resource.

Relationship between demand for a firm’s product and its marginal value

Elastic demand is one in which the shift in the amount demanded as a result of a change in price is substantial.When marginal revenue is favorable, demand is price elastic. When marginal revenue is negligible, demand is relatively inelastic.The price elasticity of demand is a metric of how the consumption of an item changes about its price change. The reactivity of the amount desired or provided of an item to a change in price is measured by the price elasticity of demand.

It is calculated by dividing the percent change in quantity demanded or supplied by the percentage change in income.The incremental money generated by each unit sold is referred to as marginal revenue. Assessing marginal revenue assists a business in determining the revenue earned by one more unit of manufacturing. A firm that sells high-volume items profits from economies of scale, allowing it to cut prices and so increase sales.

$R=P\left(Q\right)$

$MR=dR/dQ=P+\frac{dP}{dQ}\times Q=P+\left(\frac{dP}{dQ}\frac{Q}{P}\right)\times P$

$MR=$$P\times \left(1+\frac{1}{e}\right)$

If demand is inelastic $(e>-1)$, which means it does not grow much when the cost is decreased or falls much when the cost is increased, the business must not reduce prices since demand, and thus income, will not rise as much. If demand is elastic $(e>-1)$, it will respond favorably to a price decrease, resulting in higher income.