Total Revenue
Total revenue is the amount paid by buyers and received by sellers.
Where:
- TR = Total Revenue
- P = Price
- Q = Quantity sold
Price Effect and Quantity Effect
When a firm changes its price, two effects occur:
Price Effect
A higher price means each unit sold generates more revenue.
Quantity Effect
A higher price usually causes fewer units to be sold, reducing revenue.
The price elasticity of demand determines which effect is stronger.
| Demand | Price Increase | Price Decrease |
|---|---|---|
| Elastic (Ed > 1) | Total revenue decreases | Total revenue increases |
| Inelastic (Ed < 1) | Total revenue increases | Total revenue decreases |
| Unit Elastic (Ed = 1) | Total revenue unchanged | Total revenue unchanged |
Key Point
Total revenue is maximized when demand is unit elastic.
Therefore:
- Elastic demand → Price and total revenue move in opposite directions.
- Inelastic demand → Price and total revenue move in the same direction.
- Unit elastic demand → A change in price does not change total revenue.
