Demand Is Elastic: Effect on Total Revenue
For example, for a firm manufacturing keyboards, suppose that the price elasticity of demand is equal to 1.5. This means that a 10% increase in price will reduce the quantity demanded by 15%. In this case, total revenue will fall when there is an increase in price. If the price of a keyboard is raised from $100 to $110, the demand will drop by 15%.In contrast, if the price of the keyboard were to fall by 10% (from $100 to $90), the quantity demanded would rise by 15%. In this case, even though the price is falling, total revenue will rise. If a company faces elastic demand, it will want to lower prices in order to increase total revenue.
Demand Is Inelastic: Effect on Total Revenue
Demand Is Unit Elastic: Effect on Total Revenue
Unit elastic demand is a situation in which percentage change in quantity is equal to percentage change in price, and it occurs when the absolute value of the price elasticity of demand is equal to 1, or .In this case, the numerator and denominator are equal.
Relationship between the Price Elasticity of Demand and Total Revenue
|Demand||Price||Quantity Demanded||Total Revenue|