Why is it that a profit maximizing businessman would always raise prices when facing an inelastic demand curve but might or might not raise price when facing an elastic demand curve? Explain and justify your answers in detail.
Elasticity and profit maximization behavior
When facing an inelastic demand curve, a profit maximizing businessman would always raise price because increase in price will bring about increase in total revenue. On the other hand, when facing an elastic demand curve, he might or might not raise price because increase in price will bring about decrease in total revenue.
According to the law of demand, there is an inverse relationship between the quantity demanded of a particular good and its price. The degree to…show more content… QUESTION 2
Answer
Changes in the expectation of consumers.
The law of demand states that the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus. This means that an inverse relationship exists between the quantity demanded of a good and its price. It is therefore expected that when the price of a good rises, the quantity demand falls and when the price of the good falls, the quantity demanded increases. These changes in price results in movements along the demand curve. However, there are other factors beyond price which affects demand. These factors do not cause movements along the demand curve, but shifts the demand curve either to the left or to the right and are referred to as change in demand. Some of these factors include- tastes, income, substitute and complementary goods, consumer expectations and even number of buyers. These changes can be difficult to predict, short lived or relative.
In the situation cited above, the demand law was not contradicted. The ceteris paribus principle was absent. Other things were not equal. There was a consumer expectation that there is a shortage in the supply of carrots. Generally, if consumers expect the price of a good will drop soon, they will wait to buy the good at a later date and a lower price. If they expect the price of a good to rise soon, they will purchase more of the good now as opposed to waiting and risking paying more. In this case,
