Understanding Demand Elasticity: Insights for UCF Students

If a firm generates $10,000 in revenue at $6 and $8,000 at $5, what can be inferred about the demand?

• A. Demand is elastic in the $5-$6 price range
• B. Demand is inelastic in the $5-$6 price range
• C. Demand is unitary in the $5-$6 price range
• D. Revenue increases as price increases

Answer: (B)

To analyze the demand in this scenario, it is essential to consider how price changes affect total revenue. When the price increased from $5 to $6, the total revenue decreased from $8,000 to $10,000. This indicates that the firm is earning less revenue when the price is lower compared to when it is higher. In the context of elasticity, if a price increase leads to an increase in total revenue, it implies that demand is inelastic. This means that consumers are less sensitive to price changes within this range; they will continue to purchase relatively similar quantities even as prices rise. The increase in revenue as price rises suggests that the quantity demanded decreases less proportionally compared to the price increase. Therefore, the inference drawn from these observations is that demand is indeed inelastic in the price range of $5 to $6, as the relationship between price and total revenue indicates that consumers are willing to pay more without drastically reducing their quantity demanded.

When diving into the depths of microeconomics, one key concept that often surfaces is the elasticity of demand. Now, if you're gearing up for the UCF ECO2023 finals, this topic is particularly relevant. Just imagine you're at a café, contemplating whether to indulge in that extra slice of cake. The price has just gone up by a dollar. Would you still buy it? Your decision can help us uncover the fascinating world of demand elasticity!

Let’s break it down. In the scenario where a firm saw its revenue change from $8,000 at a price of $5 to $10,000 at $6, we need to ask ourselves—what does this tell us about how demand reacts to price shifts? At first glance, it might seem tempting to conclude that demand is perfectly elastic. But here's the twist: when looking closely, we can draw a different conclusion.

So, what’s the scoop? When the price rose from $5 to $6, the revenue indeed went up. This indicates that even though the price increased, the firm was still managing to pull in more bucks. That's a clue right there! It suggests that demand isn't as sensitive to price changes in this range, meaning it's likely inelastic. Essentially, consumers aren’t dropping off in numbers just because the price ticked up a notch.

You might find it interesting to know that when we say demand is inelastic, we mean that consumers continue to buy roughly the same quantity regardless of a price hike. They’re willing to pay a higher price for the item, perhaps due to loyalty, lack of substitutes, or even the perceived necessity of the product. It’s almost like when your favorite band announces concert tickets, and despite the price inflation, you’re still first in line, right? That’s consumers being pretty inelastic!

Now, connecting back to our café metaphor, if that dollar increase makes demand only slightly drop, it's clear people are still buying. In simpler terms, a firm can raise its prices and, voilà, it might end up making more money, reinforcing the inelasticity of demand in this price range.

If you’re preparing for your final exam, keep this insight handy! Understanding how to analyze shifts in price and the resulting effects on total revenue is crucial. Remember—the relationship between price and total revenue is your key to navigating questions about elasticity.

So, as you're reviewing for the UCF ECO2023 exam, consider this: When faced with a price increase, are consumers really less willing to buy, or are they simply unfazed? Diving into demand elasticity not only helps in answering exam questions but also equips you with practical knowledge for life beyond the classroom.

Ultimately, keep practicing those scenarios, and you’ll see just how engaging and relevant microeconomics can be. With a solid grasp of the concepts, you'll walk into your exam confidently, ready to tackle it head-on!