Authors libby rittenberg 240
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would decrease from $42,000 ($0.30 times 140,000) to $32,000 ($0.20
times 160,000). So it appears that the impact of a price change on total
revenue depends on the initial price and, by implication, the original
elasticity. We generalize this point in the remainder of this section.
The problem in assessing the impact of a price change on total revenue of a
good or service is that a change in price always changes the quantity
demanded in the opposite direction. An increase in price reduces the
quantity demanded, and a reduction in price increases the quantity
demanded. The question is how much. Because total revenue is found by
multiplying the price per unit times the quantity demanded, it is not clear
whether a change in price will cause total revenue to rise or fall.
We have already made this point in the context of the transit authority.
Consider the following three examples of price increases for gasoline,
pizza, and diet cola.
Suppose that 1,000 gallons of gasoline per day are demanded at a price of
$4.00 per gallon. Total revenue for gasoline thus equals $4,000 per day
(=1,000 gallons per day times $4.00 per gallon). If an increase in the price
of gasoline to $4.25 reduces the quantity demanded to 950 gallons per day,
total revenue rises to $4,037.50 per day (=950 gallons per day times $4.25
per gallon). Even though people consume less gasoline at $4.25 than at
$4.00, total revenue rises because the higher price more than makes up for
the drop in consumption.
Next consider pizza. Suppose 1,000 pizzas per week are demanded at a
price of $9 per pizza. Total revenue for pizza equals $9,000 per week
(=1,000 pizzas per week times $9 per pizza). If an increase in the price of
pizza to $10 per pizza reduces quantity demanded to 900 pizzas per week,
total revenue will still be $9,000 per week (=900 pizzas per week times
$10 per pizza). Again, when price goes up, consumers buy less, but this
time there is no change in total revenue.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
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