The influences of price elasticity of demand(Microeconomics) Essay

The influences of price elasticity of demand(Microeconomics) - Essay Example These are usually elastic goods. Price elasticity of demand influences total revenue. When there is increase in price, more revenue is generated on every item that is sold along with the fact that there are fewer items sold. When the aim is to increase total revenue, we must decide which effect is larger. In case of inelastic demand, the increased price affects the total revenue significantly which become directly proportional to increase in price; whereas, in case of elastic demand, the factor that influences total revenue is the lower quantity which makes the revenue inversely proportional to increase in price. Mainly, there are three factors that contribute to demand elasticity (Investopedia, 2010). These are explained below along with a description of how these factors influence consumers to purchase goods: The thumb rule is that: the more is the availability of product substitutes, the more elastic is the demand. Increase in price of elastic goods will influence their demand and the consumer will start looking for other options to replace the product he was using. For example, if the price of tetra pack milk goes up by $1.25, the consumer will start buying fresh milk. Thus, the demand of tetra pack milk decreases. But the industry itself is inelastic, that is if the price of milk as a whole goes up, the consumer will not stop buying milk as it is a necessity. â€Å"Thus, while a product within an industry is elastic due to the availability of substitutes, the industry itself tends to be inelastic† (Investopedia, 2010). This factor deals with the amount of income that is available for a person to spend on goods. If price of an elastic good goes up and the income remains the same, the person will have less to spend on that good than what he had to spend before price increased. For example, the quantity of tetra packs he bought