Elasticity & Revenue
Economics: Edexcel A A Level, topic 1.2.5
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.
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.
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.
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.
Total revenue
- Total revenue = price per unit × quantity.
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.
Price elastic in demand
- If a product is price elastic in demand:
- Decreasing price = increases total revenue.
- Increasing price = decreases total revenue.
Price inelastic in demand
- If a product is price inelastic in demand:
- Decreasing price = decreases total revenue.
- Increasing price = increases total revenue.
Test yourself on Elasticity & Revenue
If demand is inelastic, how should a firm change their price to maximise revenue?
How does price elasticity of demand (PED) change along the demand curve?
Total revenue is maximised when the price elasticity of demand equals what?
If demand for a product is inelastic, which of the following is true?