Economics question on elasticity

Question

Along a given demand curve, the price-elasticity of demand will change. In particular, demand for the good you are selling may be elastic at high prices and low quantities, but inelastic at low prices and high quantities.

A)Why is it the case that in the inelastic portion of demand, you can unambiguously conclude that profit increases as you cut production?

(b) Why is it the case that in the elastic portion of demand, you can't unambiguously conclude that profit increases as you increase production (i.e., here \it depends")?

Answer 1

Elasticity means the responsiveness of demand to a given change in price. 

 

A) When production gets cut, supply decreases and so the total cost for the company also decreases. However, since the demand is inelastic so with a given change in price the demand changes by less than the change in price. The decrease in supply, given the original demand moves the prices up for the product. The increase in prices decreases the demand but by lesser amount than the increase in prices due to its inelastic nature. So, the total revenue for the firm increases.

 

Therefore, decrease in total cost and increase in total revenue, increases the profits of the firm.

 

 

B) When production gets increased, supply increases and so the total cost for the company also increases.  Since the demand is elastic so with a given change in price the demand changes by more than the change in price. The increase  in supply, given the original demand decreases the prices of the product. The decrease in prices increases the demand by more than the decrease in prices due to its elastic nature. So, the total revenue for the firm increases.

However, the increase in profits will depend upon the total cost and the total revenue.

 

If the increase in total cost (due to the increase in supply) > the increase in total revenue, then profits of the firm goes down.

If the increase in total cost (due to the increase in supply) < the increase in total revenue, then profits of the firm goes up.