Question

If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue that orange juice sellers receive?

Short answer

For orange juice with an inelastic demand, an increase in price should increase the revenue that orange juice sellers receive.

Step-by-step solution

Define Inelastic Demand

The demand for a product is said to be inelastic if the quantity demanded by consumers does not change much with changes in price. It means that consumers will still buy nearly the same quantity even if the price increases. This is normally true for necessities where we do not have an option but to buy them.

Understand the Revenue

The revenue of the sellers is the total money they get from selling their product. It is calculated by multiplying the price of the product by the quantity sold.

Relation between Price and Revenue

In the case of inelastic demand, an increase in price does not cause a significant reduction in quantity demanded. Therefore, despite the potential reduction in quantity sold due to increased price, since the demand is inelastic, the revenue is expected to increase overall due to the price increase.

Key concepts

Price Elasticity of Demand

The price elasticity of demand is a measure that captures the responsiveness of the quantity demanded of a product to changes in its price. When consumers are less sensitive to price changes, we say the demand is inelastic. In mathematical terms, elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in price.

With inelastic demand, the elasticity value is less than 1. This indicates that the change in quantity is proportionally less than the change in price. Products that are necessities, such as medication or basic food items, often exhibit inelastic demand because consumers have to purchase them regardless of price changes. Understanding this concept is crucial as it directly influences pricing strategies and expected revenue.

Consumer Behavior

Consumer behavior refers to the purchasing patterns and decision-making processes of buyers. When demand is inelastic, it suggests that consumers value the product so highly that they will continue to buy it even if the price goes up. This behavior is typical for essential items that do not have close substitutes.

Factors affecting consumer behavior include income level, preferences, and the availability of alternatives. For example, if orange juice is the only source of a particular nutrient, and no substitutes provide it, then an increase in its price will not significantly reduce its consumption, illustrating inelastic demand.

Revenue Calculation

Revenue calculation plays a pivotal role in business operations and involves determining the total income generated from sales. The formula for calculating revenue is simple: multiply the price at which goods or services are sold by the quantity sold \(\text{Revenue} = \text{Price} \times \text{Quantity Sold}\).

In the context of inelastic demand, an increase in price leads to a proportionally smaller decrease in quantity sold, if any decrease at all. Therefore, the overall effect is a rise in total revenue. Even if some customers are lost due to the price hike, the higher price paid by the remaining customers compensates for this loss, resulting in increased revenue for sellers of products with inelastic demand, such as the orange juice example given.