Question

Explain how total revenues are affected by the price elasticity of demand.

Answer 1

Total revenue depends on the price elasticity of demand.

If demand is inelastic, this means % change in quantity is less than the % change in price. So, in such a case, increasing price leads to higher revenue and lowering price leads to lower revenue.

If demand is elastic, it means the % change in quantity is higher than the % change in price. So, increasing price leads to lower revenue and lowering price leads to higher revenue.

In the case of unitary elastic demand, the revenue remains the same irrespective of price.