Elasticity & Total Revenue
Profit, Revenue & Elasticity
Total Revenue & Profit
• Total revenue (TR) = Price X Quantity Sold
– The total amount of money received by a business selling products.
– $ COMING IN => It is NOT profit!
• Profit = TR – All Expenses
3 Ways to ↑ Profit:
(costs)
Business Example
Coffee Shop: Price coffee:
Qty Sold:
$2/cup
500 cups per day
Total Revenue = $2 X 500 cups = $1,000
Total Revenue
Price
Total Revenue changes as you move along the demand
curve based on the elasticity of demand
$4
Price × Quantity = $400
Demand
( Total Revenue)
0
100
Quantity
Quantity
All linear demand curves have both elastic
& inelastic ranges and unit elastic point
Price
$7
Elastic Range: Elasticity > 1
6
5
Unit Elastic at midpoint of line
4
3
Inelastic Range: Elasticity < 1
% ∆ Qty D
Ed =
-------- .
%∆P
2
1
0
2
4
6
8
10
12
14
Top of Demand Curve = Elastic
Quantity
Bottom = Inelastic
Price Increases & Total Revenue
• As price ↑ in elastic ranges => TR falls
•As price ↑ in inelastic range => TR rises
•TR reaches maximum @ unit elastic
.
.
Total Revenue
Price ↑
TR ↓
Elastic
.
Total Revenue
.
Price ↑
TR ↑
Inelastic
Total Revenue & Elasticity
Worksheet
All linear demand curves have both elastic
& inelastic ranges
Points with high price & low quantity demand is elastic
Mid-point of line is unit elastic
Points with low price & high quantity demand is inelastic