The Effect of Price Elasticity of Demand on Revenue

1
PED and Revenue
2
Price Quantity Demanded Total revenue TR P x Q Marginal Revenue (?TR) (insert on lines)
10 0
9 1
8 2
7 3
6 4
5 5
4 6
3 7
2 8
1 9
0 10
3
Price Quantity Demanded Total revenue TR P x Q Marginal Revenue (?TR) (insert on lines)
10 0
9 1
8 2
7 3
6 4
5 5
4 6
3 7
2 8
1 9
0 10
Price Quantity Demanded Total revenue TR P x Q Marginal Revenue (?TR) (insert on lines)
10 0 0
9 1 9
8 2 16
7 3 21
6 4 24
5 5 25
4 6 24
3 7 21
2 8 16
1 9 9
0 10 0
Price Quantity Demanded Total revenue TR P x Q Marginal Revenue (?TR) (insert on lines)
10 0 0 9
9 1 9 7
8 2 16 5
7 3 21 3
6 4 24 1
5 5 25 -1
4 6 24 -3
3 7 21 -5
2 8 16 -7
1 9 9 -9
0 10 0
4
Revenue at differing elasticities

• If PED is elastic then there is an INCREASE
  in revenue when price falls.
• This is because the fall in revenue from the
  price drop is MORE than offset by the GREATER
  than proportional increase in demand

PED -1
Elastic
Inelastic
TR maximised at PED-1 and MR 0
D in QD gt D in P Revenue rises with price
fall
D in QD lt D in P Revenue rises with price
rise
5

• If PED is unitary then there is NO CHANGE in
  revenue when price Changes.
• This is because the fall in revenue from the
  price drop is EXACTLY offset by the EXACTLY
  proportional increase in demand

6

• If PED is inelastic then there is a
  DECREASE in revenue when price falls.
• This is because the fall in revenue from the
  price drop is LESS than offset by the LESS
  than proportional increase in demand