4/18/2020

Price Elasticity and Total Revenue

Price elasticity Percentage change in Q
=
of demand Percentage change in P

Total Revenue = P x Q
 If demand is elastic, then
price elasticity of demand > 1
% change in QD > % change in P
 The fall in revenue from lower QD is greater
than the increase in revenue from higher P,
so revenue falls. (Inverse relationship between
Price and total revenue)

1
 4/18/2020

Price Elasticity and Total Revenue

Elastic demand
Demand for lost
(elasticity = 1.8) P your websites revenue
due to
If P = $200, lower Q
Q = 12 and
$250
revenue = $2400.
$200
If P = $250, D
Q = 8 and
revenue = $2000.
When D is elastic, Q
8 12
a price increase increased
causes revenue to fall. revenue due
to higher P

Price Elasticity and Total Revenue

Price elasticity Percentage change in Q
=
of demand Percentage change in P

 If demand is inelastic, then

price elasticity of demand < 1
% change in QD < % change in P
 The fall in revenue from lower QD is smaller
than the increase in revenue from higher P,
so revenue rises. (A direct relationship
between price and total revenue)

2
 4/18/2020

Price Elasticity and Total Revenue

Now, demand is
inelastic: Demand for
elasticity = 0.82 your websites lost
P
If P = $200, revenue
due to
Q = 12 and
$250 lower Q
revenue = $2400.
If P = $250, $200
Q = 10 and D
revenue = $2500.
When D is inelastic, Q
a price increase increased 10 12
causes revenue to rise. revenue due
to higher P