1.2. Impact of demand elasticity on price and total revenue

When the price elasticity of demand for a good is elastic (|Ed| > 1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa (Picture a).

When the price elasticity of demand for a good is unit elastic (or unitary elastic) (|Ed| = 1), the percentage change in quantity is equal to that in price (Picture b)

When the price elasticity of demand for a good is inelastic (|Ed| < 1), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue of producers rises, and vice versa. (Picture c)

When the price elasticity of demand for a good is perfectly elastic (Ed is undefined), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue of producers falls to zero. The demand curve is a horizontal straight line.

When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good.

Action on the market
Price decrease
	More expenditure	Expenditure constant	Less expenditure
Price increase
	Less expenditure	Expenditure constant	More expenditure

This information is very useful in marketing researches. Produsers can understand the way of thinking their main purchasers through elasticity investigations. For there is special relationship between Price elasticity and Total revenue dynamics sellers can make their decidions about prises (increase or decrease) in order to increase profit.

Relationship between Price elasticity and Total revenue dynamics

1.3. Income elasticity of demand (yed) and Cross elasticity of demand (ced)

The income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income.

C ategories of income elasticity:

A negative (E_i<0) income elasticity of demand is associated with inferior goods. Inferior good's demand falls as consumer income increases. An increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes.

A positive income elasticity of demand (E_i >0)is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.

A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the quantity demanded of a good.

C ross elasticity of demand (CED) is a numerical measure of the responsiveness of the quantity demanded of product X to a change in price of product Y.

E_xy =Persantage changes in Quantity demanded of good X