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Unformatted text preview: When a demand curve is elastic (a price elasticity greater than 1), a price increase reduces total revenue, and a price decrease raises total revenue. In the special case of unit elastic demand (a price elasticity exactly equal to 1), a change in the price does not affect total revenue. Demand Quantity Price Revenue $200 $4 50 Demand Quantity Price Revenue $100 $5 20 Figure 5-4 H OW T OTAL R EVENUE C HANGES W HEN P RICE C HANGES : E LASTIC D EMAND . With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Therefore, total revenue (the product of price and quantity) decreases. Here, an increase in the price from $4 to $5 causes the quantity demanded to fall from 50 to 20, so total revenue falls from $200 to $100....
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- Spring '10