1.2.5

Elasticity & Revenue

Test yourself

Changing Price and the Impact on Revenue

If demand for a product is inelastic, a producer can increase price without the quantity sold falling very much.

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Elastic demand

  • Imagine Ed Sheeran is selling tickets to his concert at Wembley.
  • He must set a price to maximise revenue from ticket sales.
  • He starts off with a fixed price in his head. He will sell a number of tickets at this price.
  • If demand is elastic, then Ed should cut the price because this will raise total revenue.
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Inelastic demand

  • If demand is inelastic, then Ed should raise the price because this will raise total revenue. Ed Sheeran is likely to sell the same number of tickets but at a higher price. Perhaps he has Shawn Mendes turning up too.
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Unitary demand

  • If there is unitary elasticity, any percentage change in price will be offset by an equivalent percentage change in quantity demanded.
  • So for moderate price changes, revenue will not change.

Total Revenue and Price Elasticity of Demand

You should be able to understand the relationship between price elasticity of demand and a firm's total revenue.

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Total revenue

  • Total revenue = price per unit × quantity.
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Straight-line demand curve

  • This is how price elasticity of demand (PED) changes along the demand curve:
    • At zero demand or high price - minus infinity.
    • At midpoint - elasticity is minus one.
    • At zero price or high quantity - elasticity is zero.
  • PED of +/- one = maximised total revenue.
    • The closer a product's price is to the midpoint, the higher the revenue.
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Price elastic in demand

  • If a product is price elastic in demand:
    • Decreasing price = increases total revenue.
    • Increasing price = decreases total revenue.
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Price inelastic in demand

  • If a product is price inelastic in demand:
    • Decreasing price = decreases total revenue.
    • Increasing price = increases total revenue.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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