Authors libby rittenberg 241

Now consider diet cola. Suppose 1,000 cans of diet cola per day are
demanded at a price of $0.50 per can. Total revenue for diet cola equals
$500 per day (=1,000 cans per day times $0.50 per can). If an increase in
the price of diet cola to $0.55 per can reduces quantity demanded to 880
cans per month, total revenue for diet cola falls to $484 per day (=880 cans
per day times $0.55 per can). As in the case of gasoline, people will buy less
diet cola when the price rises from $0.50 to $0.55, but in this example total
revenue drops.
In our first example, an increase in price increased total revenue. In the
second, a price increase left total revenue unchanged. In the third example,
the price rise reduced total revenue. Is there a way to predict how a price
change will affect total revenue? There is; the effect depends on the price
elasticity of demand.

Elastic, Unit Elastic, and Inelastic Demand
To determine how a price change will affect total revenue, economists
place price elasticities of demand in three categories, based on their
absolute value. If the absolute value of the price elasticity of demand is
greater than 1, demand is termed price elastic. If it is equal to 1, demand
is unit price elastic. And if it is less than 1, demand is price inelastic.

Relating Elasticity to Changes in Total Revenue
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
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

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