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Inelastic Demand - Prices and Producer Revenue

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 16 Feb 2019

This short revision clip cements student understanding of the importance of price elasticity of demand for the total revenue of a supplier when the market price changes. When the coefficient of price elasticity is less than one, an increase in market price leads to an increase in total revenue.

Inelastic Demand - Prices and Producer Revenue

3 causes of a business facing a relatively price inelastic demand curve

  • Small number of close substitutes in the market – meaning less choice for consumers
  • High cost of substitution – e.g. perhaps due to customers signing contracts with penalty clauses
  • Strong brand loyalty / habitual consumer preferences

2 possible impacts of this for either their supplier or their customers

  • Ability to raise price to increase total revenue and achieve a higher profit margin
  • Consumer may lose some consumer surplus e.g. if a firm takes advantage of differences in price elasticity of demand to engage in price discrimination

1 strategy a firm might use to make demand price inelastic

  • Heavy spending on persuasive advertising and marketing

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