When the price of a good or service changes, the quantity demanded changes in the opposite direction. Total revenue will move in the direction of the variable that changes by the larger percentage. If the variables move by the same percentage, total revenue stays the same. If quantity demanded changes by a larger percentage than price (i.e., if demand is price elastic), total revenue will change in the direction of the quantity change. If price changes by a larger percentage than quantity demanded (i.e., if demand is price inelastic), total revenue will move in the direction of the price change. If price and quantity demanded change by the same percentage (i.e., if demand is unit price elastic), then total revenue does not change. When demand is price inelastic, a given percentage change in price results in a smaller percentage change in quantity demanded. That implies that total revenue will move in the direction of the price change: a reduction in price will reduce total revenue, and an increase in price will increase it. Consider the price elasticity of demand for gasoline. In the example above, 1,000 gallons of gasoline were purchased each day at a price of $4.00 per gallon; an increase in price to $4.25 per gallon reduced the quantity demanded to 950 gallons per day. We thus had an average quantity of 975 gallons per day and an average price of $4.125. We can thus calculate the arc price elasticity of demand for gasoline:
The demand for gasoline is price inelastic, and total revenue moves in the direction of the price change. When price rises, total revenue rises. Recall that in our example above, total spending on gasoline (which equals total revenues to sellers) rose from $4,000 per day (=1,000 gallons per day times $4.00) to $4037.50 per day (=950 gallons per day times $4.25 per gallon). When demand is price inelastic, a given percentage change in price results in a smaller percentage change in quantity demanded. That implies that total revenue will move in the direction of the price change: an increase in price will increase total revenue, and a reduction in price will reduce it. Consider again the example of pizza that we examined above. At a price of $9 per pizza, 1,000 pizzas per week were demanded. Total revenue was $9,000 per week (=1,000 pizzas per week times $9 per pizza). When the price rose to $10, the quantity demanded fell to 900 pizzas per week. Total revenue remained $9,000 per week (=900 pizzas per week times $10 per pizza). Again, we have an average quantity of 950 pizzas per week and an average price of $9.50. Using the arc elasticity method, we can compute:
Demand is unit price elastic, and total revenue remains unchanged. Quantity demanded falls by the same percentage by which price increases. Consider next the example of diet cola demand. At a price of $0.50 per can, 1,000 cans of diet cola were purchased each day. Total revenue was thus $500 per day (=$0.50 per can times 1,000 cans per day). An increase in price to $0.55 reduced the quantity demanded to 880 cans per day. We thus have an average quantity of 940 cans per day and an average price of $0.525 per can. Computing the price elasticity of demand for diet cola in this example, we have:
The demand for diet cola is price elastic, so total revenue moves in the direction of the quantity change. It falls from $500 per day before the price increase to $484 per day after the price increase. A demand curve can also be used to show changes in total revenue. Figure 5.3 "Changes in Total Revenue and a Linear Demand Curve" shows the demand curve from Figure 5.1 "Responsiveness and Demand" and Figure 5.2 "Price Elasticities of Demand for a Linear Demand Curve". At point A, total revenue from public transit rides is given by the area of a rectangle drawn with point A in the upper right-hand corner and the origin in the lower left-hand corner. The height of the rectangle is price; its width is quantity. We have already seen that total revenue at point A is $32,000 ($0.80 × 40,000). When we reduce the price and move to point B, the rectangle showing total revenue becomes shorter and wider. Notice that the area gained in moving to the rectangle at B is greater than the area lost; total revenue rises to $42,000 ($0.70 × 60,000). Recall from Figure 5.2 "Price Elasticities of Demand for a Linear Demand Curve" that demand is elastic between points A and B. In general, demand is elastic in the upper half of any linear demand curve, so total revenue moves in the direction of the quantity change.
Figure 5.3 Changes in Total Revenue and a Linear Demand Curve  Moving from point A to point B implies a reduction in price and an increase in the quantity demanded. Demand is elastic between these two points. Total revenue, shown by the areas of the rectangles drawn from points A and B to the origin, rises. When we move from point E to point F, which is in the inelastic region of the demand curve, total revenue falls. A movement from point E to point F also shows a reduction in price and an increase in quantity demanded. This time, however, we are in an inelastic region of the demand curve. Total revenue now moves in the direction of the price change – it falls. Notice that the rectangle drawn from point F is smaller in area than the rectangle drawn from point E, once again confirming our earlier calculation. We have noted that a linear demand curve is more elastic where prices are relatively high and quantities relatively low and less elastic where prices are relatively low and quantities relatively high. We can be even more specific. For any linear demand curve, demand will be price elastic in the upper half of the curve and price inelastic in its lower half. At the midpoint of a linear demand curve, demand is unit price elastic.
If you're seeing this message, it means we're having trouble loading external resources on our website. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. Total revenue is the total receipts a seller can obtain from selling goods or services to buyers. It can be written as P × Q, which is the price of the goods multiplied by the quantity of the sold goods.
A perfectly competitive firm faces a demand curve that is infinitely elastic. That is, there is exactly one price that it can sell at – the market price. At any lower price it could get more revenue by selling the same amount at the market price, while at any higher price no one would buy any quantity. Total revenue equals the market price times the quantity the firm chooses to produce and sell.
As with a perfect competitor, a monopolist’s total revenue is the total receipts it can obtain from selling goods or services to buyers. It can be written as P × Q {\displaystyle P\times Q} , which is the price of the goods multiplied by the quantity of the sold goods. A monopolist's total revenue can be graphed as in Figure 1, in which Price (P) is the height of the box, and Quantity (Q) is the width. P × Q {\displaystyle P\times Q} , (i.e., total revenue) equals the area of the box. Letting TR be the total revenue function: T R ( Q ) = P ( Q ) × Q {\displaystyle {\mathit {TR}}(Q)=P(Q)\times Q} ,[1] where Q is the quantity of output sold, and P(Q) is the inverse demand function (the demand function solved out for price in terms of quantity demanded). Continuing to use Figure 1 as an example, price can be written as a function of quantity: P = − Q + 6 {\displaystyle P=-Q+6} , and be substituted into TR(Q) to get the TR function T R = − Q 2 + 6 Q {\displaystyle {\mathit {TR}}=-Q^{2}+6Q} , which is a quadratic. In Figures 2 through 4, this function is shown graphically by using an example of demand for apples. The quantity of apples demanded drops as the price increases, which leads to the changes of the total revenue. Figure 1 A linear demand curve (top) and resulting total revenue curve (bottom) Figure 2 Figure 4 Figure 3 The function of TR is graphed as a downward opening parabola due to the concept of elasticity of demand. When price goes up, quantity will go down. Whether the total revenue will grow or drop depends on the original price and quantity and the slope of the demand curve. For example, total revenue will rise due to an increase in quantity if the percentage increase in quantity is larger than the percentage decrease in price. The percentage change in the price and quantity determine whether the demand for a product is elastic or inelastic. The changes in total revenue are based on the price elasticity of demand, and there are general rules for them:[2]
The above movements along the demand curve result from changes in supply:
Rational people and firms are assumed to make the most profitable decision, and total revenue helps firms to make these decisions because the profit that a firm can earn depends on the total revenue and the total cost. Total revenue can help with a firm's operational decision: whether the firm should be shut down or kept open. In the short run, if the total revenue (TR) that a firm can earn from operating will not exceed the variable costs (VC) of operation, the firm should be shut down.
In the long run, a similar rule also can be applied when a firm needs to decide whether it should enter or exit a market. Here physical capital costs are relevant, and together with variable costs they give total long-run costs (TC):
The rules are opposite for entering a market:
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What happens to total revenue if price increases and the price increases and the price elasticity of demand is?
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