Question

I am watching the lecture 3 elasticity. At13:29 the professor is talking about the relationship between Elasticity and Revenue; he says " If the elasticity is between 0 and minus 1, then raising prices will raise revenues. If the elasticity is greater than minus 1, then raising prices will lower revenues." But he didn't prove that? Who can help me to explain why? Tks a lot!

Answer 1

Hi,

Well, first of all I think he meant: If the elasticity is greater than minus 1 - in absolute value - then raising prices will lower revenues. (btw he corrects himself later in the class).
The equation is Delta R / Delta P = Q (1+E)
So Delta R / Delta P is positive when 1+E>0 -> 0>E>-1 -> in this case raising prices will increase revenues
And Delta R / Delta P is negative when 1+E<0 -> E<-1 ->in this case raising prices will decrease revenues

I hope this makes sense.

Answer 2

Thank you very much!