Why Are Total Expenditures on a Good Maximized at the Point

question 34

Essay

Why are total expenditures on a good maximized at the point on the demand curve where the price elasticity of demand equals -1? Explain your answer using the appropriate algebra.

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Definitions:

Short-Run Supply

A graphical representation that shows the quantity of goods that suppliers are willing and able to produce and sell at different prices in the short-term, with some inputs fixed.

Short Run

A time period in economics where at least one factor of production is fixed, limiting the immediate response to changes in demand or supply.

AVC

Average Variable Cost, the total variable cost divided by the quantity of output, representing the variable cost per unit of output.

Shutdown Point

The level of output at which a company is not making enough revenue to cover its variable costs, making it economically viable to cease production temporarily.