Lesson preview · Applying Ped
Total Revenue & Pricing
~8 min · Free to read
Elasticity stops being abstract once you connect it to money. Every business owner wants to know: if I change my price, will I make more revenue or less? PED answers this directly through the Total Revenue Test, which doubles as a complete pricing rulebook.
Key Term
Total Revenue (TR)
. When price changes, both and move — and elasticity tells you which one dominates.
The tension: P up is good for revenue, but Q falls. PED tells you who wins.
Key Term
The Total Revenue Test
Elastic (): and TR move in opposite directions. Raise → TR falls. Lower → TR rises. Inelastic (): and TR move in the same direction. Raise → TR rises. Lower → TR falls. Unit elastic (): TR is at its maximum. Don’t touch the price.
The logic: when demand is elastic, the quantity response is bigger than the price change, so raising price loses more customers than it gains in higher per-unit revenue. When demand is inelastic, quantity barely budges, so raising price almost directly raises TR.
Key Term
The Pricing Rules (decision rulebook)
Inelastic demand? → Raise prices to grow revenue. Elastic demand? → Lower prices to grow revenue. Unit elastic? → You’re already at max revenue.
The big takeaway from the picture: TR is maximized at the middle of a linear demand curve, where . Move away from the middle in either direction and revenue falls. Above the middle (elastic), the rectangle gets tall and skinny — the area drops. Below (inelastic), it gets short and wide — the area drops too. The Total Revenue Test is just this geometry put into words.
Trap · Common Misconception
'Lower prices always sell more' is misleading
Selling more units isn’t the same as making more money. With inelastic demand, lowering price boosts quantity a little but slashes per-unit revenue — TR falls. With elastic demand, raising price drives away so many customers that TR drops. The right move depends entirely on PED. Volume ≠ revenue.
This is why pharmaceutical companies love price hikes (inelastic drugs), airlines run constant sales (elastic leisure travel), and Costco cuts prices to drive volume (elastic consumer goods). They’re all following the rule.
Check yourself · no marks
A firm raises its price by 10% and total revenue falls. What does this tell you about PED?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Check yourself · no marks
A concert promoter knows their shows sell out every time, regardless of ticket price. Should they raise prices to increase revenue?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Tip
The Decision Flowchart
- What’s the good?
- What’s its PED? (Use the SNAP-N determinants from KP1.)
- Inelastic → raise prices.
- Elastic → lower prices.
- Unit elastic → you’re at max revenue.
Practice · 1 / 5
Demand for a good is elastic. If the firm raises its price, total revenue will:
Next
Like what you read?
Sign up free to save your progress, get spaced reviews tuned to you, and unlock all 50 microeconomics knowledge points with interactive graphs and adaptive practice.