2. Basic Definition
Total Revenue is the total amount of sales of goods and services
Total Revenue : Price (P) * Quantity (Q)
Price elasticity of demand(PED) is the ratio of the percentage change in quantity demanded of a
product to the percentage change in price
If PED = > 1, The product has Elastic Demand
If PED = < 1, The product has Inelastic Demand
If PED = 1, The product has Unitary Elastic Demand
3. Relationship
If the demand is elastic, a price change causes total revenue to change in the
opposite direction
Price = Total Revenue
Price = Total Revenue
If the demand is inelastic, a price change causes total revenue to change in the
same direction
Price = Total Revenue
Price = Total Revenue
if the demand is unit-elastic, a change in price will not change the total revenue
4. Total Revenue with
Elastic Demand
Suppose that, the original price of Product is TK. 5
and the original quantity demanded is 500
Thus, the original total revenue is TR = P x Q = 5 x
500 = TK. 2, 500/=
This is represented by the areas A + B
Now, if the price is decreased from TK 5 to TK 3,
and the quantity demanded increases from 500 to
1000 ( PED will be 2.5)
That is, the demand for this products is elastic and
the total revenue will be TR = P x Q = 3 x 1,000=
3,000
This is represented by areas B + C
So, When the demand is elastic a decrease in price
will increase the revenue
Opposite will happen if the price of the product
increases. Total Revenue will be decreased
5
4
3
2
1
0 250 500 750 1000
Price
Quantity
D
S
A
B C
5. Total Revenue with
Inelastic Demand
Suppose that, the original price of a product is
TK 2 and the original quantity demanded is
10,000
Thus, the original total revenue is TR = P x Q =
2 x 10 000 = TK 20 000
This is represented by area B+C
Now, if the price is increased from TK 2 to TK
3, the quantity demanded will decrease from
10,000 to 8,000 ( PED will be 0.4)
That is, the demand for this product is inelastic
and the total revenue is TR = P x Q = TK 3 x 8
000 = TK 24 000
This is represented by areas A+B
So, When the demand is inelastic a increase in
price will increase Total Revenue
Opposite will happen if the price of the product
decreases. Total Revenue will be decreased
5
4
3
2
1
0 2000 4000 6000 8000 10000
Price
Quantity
D
S
A
B C
6. Total Revenue with
Unit-elastic Demand
Suppose that the original price of a product is
TK 3 and the original quantity demanded is
1,000
Thus, the original total revenue is TR = P x
Q = $3 x 1000 = TK 3 000
This is represented by area B+C
Now, if the price is increased from TK 3 to
TK 6 then quantity demanded will decrease
from 1,000 to 500. ( PED will be 1)
That is, the demand is elastic and total
revenue is TR = P x Q = TK 6 x 500 = TK
3,000
This is represented by the area A+B
So, When the demand is Unit elastic a
increase/decrease in price will not change
Total Revenue
6
5
4
3
2
1
0 250 500 750 1000
Price
Quantity
D
S
A
B C
7. Conclusion
“Well, that is all I have for today. Let me now summarize what I have presented regarding
Relationship Between Price Elasticity of Demand & Total Revenue .
When a demand is inelastic, a price increase raises total revenue, and a price decrease
reduces total revenue.
When a demand is elastic, a price increase reduces total revenue, and a price decrease
raises total revenue.
In the case of unit elastic demand, a change in the price does not affect total revenue.
