Question

You are the brand manager of crest toothpaste and you observe that when you increase the price of crest, your total revenue increases. How is that possible ?

Answer 1

The increase in total revenue due to increase in price is totally possible. This happens when the demand for a product is inelastic. In other words, when the percentage decline in quantity demanded is lesser than the percentage rise in price level, it suggests that demand is less responsive to change in price levels. Thus, even when the prices are increases, the quantity declines by lesser proportion and the total revenue rises.

For example, let us suppose that the price level is risen from $ 5 to $10 and the quantity declines (in accordance with the law of demand) from 20 to 18.

Total revenue in initial case = 5 × 20 = $100

Total revenue in second case = 10 × 18 = $180.

Thus, even when the prices were increased, the total revenue increased because of inelastic demand.