Total Revenue And Elasticity Essay
Sellers may want to increase prices in order to increase revenue; however whether or not revenue actually increases depends on the elasticity of demand. If demand is elastic, …show more content…
The price of brownies is $1 for each brownie. A total of 100 brownies are sold, creating total revenue of $100. Now the baker believes that they could earn more money if the price increased. Brownies are now being sold for $1.75. However, at this price, brownie lovers only buy 25 brownies instead of 100.
Revenue beforehand- $1 x 100 = $100
Revenue after price increase - $1.75 x 25 = $43.75
After the price increase, total revenue actually decreased. This is because the demand for brownies is elastic, meaning that consumers of brownies respond and will change the buying behavior when prices of brownies increase. This is due to the relationship between elasticity and total revenue. If demand is elastic, then increases in price would actually decrease total revenue because consumers will purchase less.
Just to double check, let’s check the elasticity for brownies using the elasticity for demand formula.
(% change in quantity demanded)/(% change in price)
(75/62.5)/ (0.75/ 1.375) = 1.2/0.54= 2.2, since this is greater than 1, demand is elastic.
Now, let’s say that demand for brownies was inelastic, which meant that brownie consumers would till purchase brownies regardless of the price increase. So now with the prince increase of $1.75, consumers buy 95