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1. Describe the relation between elasticity of demand and revenue?

Ans:- The importance of the price elasticity of demand for a business can be shown by the effect that it
has on total revenue. The business will want to know whether a proposed price change will increase or
decrease total revenue.
Total revenue, by definition, is equal to the price times the quantity sold (TR=PxQ). [Sometimes, when
dealing with elasticity, the language used may call these total expenditures instead of total revenue, but
it has the same meaning].
Note what happens to the results of this formula (TR=PxQ) if a price change is involved. Due to the law of
demand, the price will move in one direction, and the quantity sold will move in the other
direction. Unless the price change and quantity change are both for the same percentage (unit elastic),
then total revenue will also change whenever a price change is involved. The question is, does total
revenue increase, or decrease? The answer depends on the direction of the price change along with the
price elasticity of demand.
If the price elasticity of demand is elastic (greater than 1), then that means that the quantity change is
more than the price change. So total revenue (price times quantity) will decrease for a price increase,
and increase for a price decrease.
If the price elasticity of demand is inelastic (less than 1), then that means that the quantity change is less
than the price change. So total revenue (price times quantity), increases for a price increase, and
decreases for a price decrease.
In summary:
Elastic demand, price increase: total revenue decreases
Elastic demand, price decrease: total revenue increases
Inelastic demand, price increase: total revenue increases
Inelastic demand, price decrease: total revenue decreases
Unit elastic demand: total revenue does not change
So, you can see from this, that the price elasticity is an important element in the pricing decisions of
businesses.
One more thing about the relationship between the price elasticity of demand and total revenue: As long
as demand is elastic or inelastic, total revenue can always be increased with a price change in the proper
direction. The only point where total revenue is maximized is the point where the price
elasticity of demand is unit elastic.
2. Explain nature of long run cost curve in contrast of construction industry?
Ans: Cost curves are drawn with the quantity of a specific product along the horizontal axis and money
cost on the vertical. For an analysis of perfect competition, the assumption is that each firm faces
identical input prices and choices of technology. Under this assumption, the curves can be interpreted to
correspond either to the industry as a whole, or to a representative firm. They can represent the total
cost of the quantity, the average (per unit) cost, or the marginal cost.

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The long-run cost curves, usually presented in a separate diagram, are also expressed most commonly in
their average, or per unit, form, represented here in Figure 2. The long-run average cost (LRAC) curve is
shown to be an envelope of the short-run average cost (SRAC) curves, lying everywhere below or tangent
to the short-run curves. The firm is constrained in the short run in selecting the optimal mix of factors of
production and so will never be able to find a cheaper mix than can be found in the long-run when there
are no constraints. If there are a discrete number of plant sizes available, the LRAC will be the scalloped
curve obtained by joining those parts of the SRAC curves that represent the lowest cost of production for
a given quantity.

Figure 2. The long-run average cost (LRAC) curve is an envelope curve of the short-run average
cost (SRAC) curves. Increasing, constant and decreasing returns to scale are exhibited at points
a, b and c, respectively.
Production on large scale can reduce average costs of output. This is the basis of mass manufacturing
which standardizes units of output so that they can be produced in large numbers at low individual cost
per unit. The minimum efficient scale (MES) will vary from industry to industry depending on the nature
of the cost structure in a particular sector of the economy. There are many areas of real state where
significant economies of scale can be found. These includes large property agencies with specialized
departments (managerial and risk- bearing economics), large property investment companies with low
borrowing cost (financial economics) and large house building companies (commercial and technical
economies).
When the ratio of fixed to variable costs is very high, there is great potential for reducing the average
cost of production. This would be the case when a large investment in a factory is required in order to
engage in large- scale production. This would be the case when a large investment in a factory is required
in order to engage in large scale production. Industrialized building requires a demand that is both large
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and continuous. Thus, in order to secure the lower long- run average cost curve of industrialized building
(LRAC) resulting from design/ construction integration, factory production of components and economies
of scale, there must be a demand for at least 300 dwelling per period. To take full advantage of the
economies of scale available from industrial building, however output would need to be at 700 units,
where the LRAC is at its minimum point. Long- run average cost for traditional building (LRACTB) are
higher than those for industrial building (LRACB).
In construction industry, demand is in small parcels: 90 percent of all contracts are for fewer than 100
dwelling. Increasing the size of contracts would only be possible if the variety of building was restricted.
But private clients, especially house buyers, demands building that are individual in some way.
Industrialized building, in contrast, is frowned upon being uniform, a view mainly derived from the
austere appearance presented by local authority flats that were subject to severe cost restriction.

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Roll No: 03

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