I want to know what is the effect on total revenue when the is a percentage change in price for a perfectly elastic demand?I know that total revenue falls to zero when the price is raised...
I want to know what is the effect on total revenue when the is a percentage change in price for a perfectly elastic demand?
I know that total revenue falls to zero when the price is raised fractionally but what about for the undetermined quantity demanded at a given price?
Perfectly elastic demand means that at the market equilibrium price a firm can sell as much of a good as it wants to sell. In a situation like this there is no need for the firm to reduce its price. At the same time any increase in price results in demand dropping down to nil or zero. A company will not be able to sell even one unit of a product at a price above market equilibrium price.
A price elasticity like this applicable only to individual firms operating in a perfectly elastic market. This means that the firm is able to supply economically only a small proportion of the total market demand economically. In a situation like this the quantity demanded is considered to be unlimited. The quantity actually supplied in therefore not dependent on demand at all. It is dependent on the relationship between the marginal cost of the supplier and the quantity supplied by it. The quantity supplied by the firm is equal to the production level where its marginal cost of production equals the market price.