The Lunchbox is one of many options for workers in Lanford, IL to get a quick and tasty meal at reasonable prices. They wanted to raise prices but did not know if the demand would fall off too much. They decided to raise prices and wait and see before making the increases permanent. In the first week after they raised prices on the menu an average of 10%, they served fewer lunches but their revenue did not fall. Based on this, they decided to keep the new menu. Would you expect revenue to continue at this level?

Elasticity of demand (Ed) = % Change in quantity demanded / % Change in price

When a 10% increase in price leads to a decrease in quantity demanded (following law of demand) but revenue did not fall, it means two possibilities:

(1) Ed = 1, therefore % Change in price = % Change in quantity demanded.

In this case, demand is unit elastic, and an increase in price will not change revenue.

(2) Ed < 1, therefore % Change in price > % Change in quantity demanded.

In this case, demand is inelastic, and an increase in price will increase revenue.

In either of these cases, a price rise will lead to an increase in revenue in short run.

However, since buyers have many substitutes available, they will switch to the substitutes after few days of price rise, therefore Lunchbox will continue to lose sales. When demand will become elastic as more and more customers switch to substitutes, Lunchbox will start experiencing a decrease in revenue in the medium to long run.

Elasticity of demand

Elasticity of demand explains how an individual can stretch the demand. The concept of elasticity of demand is measured with the help of degrees. The degrees of elasticity of demand helps in analyzing that the good is necessary or a necessity.