Through the following guide we will answer the question : What is the relationship between ‘price elasticity’ and ‘total income’? Many factors intervene here, in fact, the relationship that exists between the ‘interest rate’ and ‘inflation’ is usually something relevant for the elasticity of prices and total income, so it is convenient to know basic aspects in this regard.
What is the Relationship Between ‘Price Elasticity’ and ‘Total Revenues’?
Index( )
- What are price elasticity and total income?
- What is the relationship between ‘price elasticity’ and ‘total income’?
What are price elasticity and total income?
Before starting it is necessary to know the theoretical aspects of price elasticity and total income. In this way we can conclude how each affects the other.
Price elasticity
Price elasticity responds to a phenomenon in which it is established that customers will be less likely to buy a product when its value rises. It responds to variation phenomena and how they affect business at a general level.
It is just one aspect of the law of demand and has been proven true on many occasions. Indeed, it is relatively common for sales to decrease when the price of a product increases. When this occurs we conclude that the elasticity has occurred.
In other words, we conclude that elasticity is the sensitivity that customers have to price changes. Clearly, there are many variations on this proposal, as some products are more affected than others in this area.
It has been noted that certain products, such as those in the technological field, are worse off due to price increases. The most common is that people buy these products when the price is at a competitive point . Even so, there are other products that are not so affected and do not incur price elasticity.
For example, certain essential products that have earned the trust of customers, can increase the price without affecting sales as much. In any case, the sector must be carefully analyzed to verify whether the price elasticity will be present or not. However, knowing how to best advertise a price increase also helps you not lose customers.
Total revenue
When we talk about total income, we refer to the amount of money produced by the sales of a product , in other words, they represent the income after all the manufacturing and sale processes.
It should be noted that the total income does not include all the expenses that were made before the sale. That is to say, it speaks of the total figure at which the product is sold. For example, a mobile device was sold directly from the manufacturing company for € 90, while the production value was € 70.
The total income is still € 90, although this clearly does not represent the profit exactly. In other words, aspects such as the relationship between the marginal product of labor and marginal costs are not taken into consideration .
Clearly, one way to get better income is by increasing total income and this is where price changes come in . The increase in the prices of a product, usually responds to the need of the company to generate greater income.
What is the relationship between ‘price elasticity’ and ‘total income’?
Understanding the principles mentioned above, the relationship between price elasticity and total income is close. In fact, both are nothing more than factors pertaining to the economy as we know it.
Price elasticity should be carefully considered when making any increase in total income, along with factors such as the variation in interest rates on investments . As we pointed out before, certain products are predisposed to suffer from this phenomenon, in which customers refrain from buying .
A good economist or trader will take these factors into account to determine when to increase total prices. In the same way, also by means of an exhaustive analysis it can be established what is the percentage in which the negative price elasticity for the company does not fall.
