Total revenue will decrease if price is reduced in a market where demand is
The correct answer and explanation is:
The correct answer is: Inelastic
In a market with inelastic demand, the total revenue will decrease if the price is reduced. This is because, in such markets, the percentage change in quantity demanded is less than the percentage change in price. In other words, when the price decreases, the increase in quantity demanded is not enough to compensate for the price reduction, leading to a decrease in total revenue.
To elaborate, price elasticity of demand refers to the responsiveness of the quantity demanded of a good or service to a change in its price. If demand is inelastic, it means consumers are relatively less responsive to price changes. In such cases, even a significant decrease in price will lead to a smaller increase in quantity demanded, thus resulting in lower total revenue.
Total revenue (TR) is calculated by multiplying the price of a good by the quantity sold (TR = Price × Quantity). In an inelastic market, reducing the price does not lead to a proportionate increase in quantity sold. Therefore, the lower price cannot offset the smaller increase in demand, causing total revenue to fall.
For example, consider a situation where a product has very few substitutes or is a necessity, such as medications or basic utilities. In these cases, consumers will still buy roughly the same quantity, even if the price is lowered, because they are not very sensitive to price changes. As a result, reducing the price will not lead to a significant increase in the quantity demanded, and total revenue will decrease.
On the other hand, if demand is elastic, a price reduction leads to a more than proportionate increase in quantity demanded, which would increase total revenue.