Total revenue tr is defined as tr pq price times the

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Total revenue, TR,  is defined as TR = PQ     (price times the quantity traded) Diagrammatically,
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Total Revenue, TR P D Q TR = PQ P Q TR
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. With an  inelastic  demand curve, an increase  in price leads to a decrease in quantity that is  proportionately smaller.  The gain to TR from the P increase will  outweigh the loss to TR from a decrease in Q. A firm would only lose a few sales but make  up for it by getting a higher price for the sales  it does make. TR will increase if P   if demand is inelastic.   So, if a firm wants to   TR and demand for its  good is inelastic, it should   P.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. With an  elastic  demand curve, an increase in  the price leads to a decrease in quantity  demanded that is proportionately larger.  The gain to TR from the P increase will be  outweighed by the loss in TR from lost sales. A firm would lose so many sales that even  with a higher price on the sales it does make,  it still ends up with less total revenue. TR will decrease if P   if demand is elastic. So, if a firm wants to   TR and demand for its  good is elastic, it should   P.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. If demand is unit elastic, the gain to TR from a P  increase will be exactly offset by the decrease in  Q. TR will not change if P  and demand is unit  elastic. TR will not change if P  and demand is unit  elastic. No change in P will   TR, so TR must be at a maximum when Ep = 1.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Income Elasticity of Demand Income elasticity of demand  measures how much  the quantity demanded of a good responds to a  change in consumers’ income. It is computed as the percentage change in the  quantity demanded divided by the percentage  change in income. Income elasticity is denoted E I  
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. If we are given percentage changes in income and the  corresponding changes in Qd, we use the formula E I  =     %  in Qd                               %  in I If we are given 2 levels of income and their  corresponding Qd, we use the midpoint formula. The midpoint formula is:      E I  = (Q 2  – Q 1 ) / ([Q 2  + Q 1 ] / 2)                 (I 2  – I 1 ) /([I 2  + I 1 ] / 2)
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
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