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According to the law of demand, if price increases, quantity demanded
of a good or service will
decrease or vice versa. Price elasticity of demand tells us how much
quantity demanded will
decrease when price increases or how much quantity demanded will
increase if price decreases.
On the other hand, according to the law of supply, if the price
increases, quantity supplied of a good
or service will increase. Similarly, if price decreases, quantity supplied
will decrease. The degree of
sensitivity (responsiveness) of production/supply to a change in price is
measured by the concept of
price elasticity of supply.
Total revenue is calculated as the quantity of a good or service sold
multiplied by its market price.
Thus, it is a measure of how much money a company makes from
selling its product. The core
objective of a firm is maximizing profit. One of the ways to maximize
profit is increasing total revenue.
The firm can increase its total revenue by selling more items or by
raising the price. Among others,
this depends on the nature of the price elasticity of demand. Moreover,
the length of time is an
important factor in determining price elasticity of demand and supply.