CFAI text Vol 2 page 7 says: For revenue to grow , the % increase in quantity sold must exceed % decrease in price. I tried some numbers quantity =q price = p & revenue =R 100 *3 = 300 if now Q increase by 30% and P decrease by 25% 1.3*100 X 0.75*3 = 292 I know it is silly but was wondering if i missed something
I think your conclusion is out of context. The whole premise of the chapter is to address the issue at hand. I don’t blame you because now that I read it again, I see that it can be interpreted both ways. You have to finish reading the chapter to understand the circumstances under which revenue will actually increase (assuming price is dropped by a certain percentage). It will happen if demand is elastic. In your example, revenue fell, implying demand is inelastic. Ultimately, the impact on revenue totally depends on the elasticity. Please correct me if I am wrong.
Don’t have the book under my hand but when I say: For revenue to grow , the % increase in quantity sold must exceed % decrease in price, I mean that % increase in quantity definitely must be more than % decrease in price - it is necessary… but it may not be sufficient to be just more… it may need to be significantly more… If you increase quantity by 30%, if decrease in price is less than 23.1%, revenue will increase. But one thing I can say for sure is that to increase revenue when price declined, quantity has to increase by a greater %.
"quantity =q price = p & revenue =R " qp=R Suppose % increase in quantity =% decrease in price =x, new revenue (R) R = q(1+x)*p(1-x) =qp+qpx-pqx-x2 =R-x2 R`- R = -x2 since x square would always be positive R’-R would be always negative So for equal percentage increase and decrease in price and quantity (or vice versa), the revenue would always fall
The relationship that Level One describes holds if percentage changes are calculated based on AVERAGE values. That’s what the curriculum (and Elan from which im studying) does. When you use beginning values instead of average values as the denominator when calculating percentage changes, the relationship holds true most of the time, but not in certain scenarios like the one described by Level I above.
I am just wondering would @level^one be able to change his name when he passes Level I ??? Or does he just not think he is gona pass lol? Just kidding, good luck to all. Just remmber it is mostly hard work.
level^one Wrote: ------------------------------------------------------- > CFAI text Vol 2 page 7 says: > > For revenue to grow , the % increase in quantity > sold must exceed % decrease in price. > > I tried some numbers > > quantity =q price = p & revenue =R > > 100 *3 = 300 > > if now Q increase by 30% and P decrease by 25% > > 1.3*100 X 0.75*3 = 292 > > I know it is silly but was wondering if i missed > something it’s more about log-return changes, not simple returns. If the quantity goes up by a factor of 1.3 (log return of 26.24%), then corresponding equal decrease in price would by -26.24%, which would result in decrease by a factor of 1.3 which gives 3/1.3=2.31. You can see that 130*2.31=300. Now if price goes down by more than the factor of 1.3, then revenue will drop. The mistake you made was considering simple returns, not log returns.