Demand elasticity and revenue decisions
| English | Español |
|---|---|
| price elasticity of demand/praɪs ɪlæˈstɪsɪti ɒv dɪˈmænd/ | elasticidad precio de la demanda |
| total revenue/ˈtəʊtl ˈrevənjuː/ | ingreso total |
A decision you can investigate
- A museum considers raising its entry price. More money per visitor sounds attractive, but some visitors may stop coming.
- Revenue depends on price multiplied by the number of paying visits.
Build the explanation
- PED is percentage quantity-demanded change divided by percentage price change. Interpret the magnitude: zero is perfectly inelastic; below 1 is inelastic; 1 is unitary; above 1 is elastic. Perfectly elastic demand is represented by a horizontal curve at one price in the model.
- Close substitutes, low necessity, a large income share and more time to adjust often make demand more elastic. A steep curve alone is not enough: compare percentages and hold diagram scales comparable.
Work through the evidence
- The entry price rises from 40 to 44 yuan, a 10% rise. Visits fall from 500 to 400, a −20% change. PED = −20/10 = −2, so demand is elastic over the change.
- TR before = P × Q = 40 × 500 = 20000 yuan. TR after = 44 × 400 = 17600 yuan. Revenue falls by 2400 despite a higher price. With inelastic demand a price rise instead tends to raise TR; unitary elasticity gives no TR change.
What is the PED magnitude in the museum case?
Use the ratio of percentage changes: 20/10 = 2.
If demand is inelastic over a small price reduction, what tends to happen to TR?
Quantity rises proportionately less than price falls.
A higher total revenue necessarily means a higher profit.
Profit deducts costs; the revenue change alone does not establish the profit change.
Test the limits
- Revenue is not profit: costs and the mix of visitors still matter. An elasticity estimated for one range or season need not apply to a large future price rise.
- An indirect tax on an inelastic-demand product may reduce consumption relatively little; a subsidy’s consumption effect also depends on responsiveness. Apply the response to the policy’s aim, not a slogan that all taxes work equally.
Which condition often makes demand more elastic?
Substitutes and adjustment time make switching easier.
Apply and explain your answer
- Why does revenue fall after the museum’s price rise?
- The proportionate fall in visits is larger than the proportionate rise in price.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Use the terms precisely
- price elasticity of demand 需求价格弹性: Percentage quantity-demanded change divided by percentage own-price change.
- total revenue 总收入: Price multiplied by quantity sold.
The entry price rises from 40 to 44 yuan, a 10% rise. Visits fall from 500 to 400, a −20% change. PED = −20/10 = −2, so demand is elastic over the change. TR before = P × Q = 40 × 500 = 20000 yuan. TR after = 44 × 400 = 17600 yuan. Revenue falls by 2400 despite a higher price. With inelastic demand a price rise instead tends to raise TR; unitary elasticity gives no TR change.
Revenue is not profit: costs and the mix of visitors still matter. An elasticity estimated for one range or season need not apply to a large future price rise. An indirect tax on an inelastic-demand product may reduce consumption relatively little; a subsidy’s consumption effect also depends on responsiveness. Apply the response to the policy’s aim, not a slogan that all taxes work equally.
PED is percentage quantity-demanded change divided by percentage price change. Interpret the magnitude: zero is perfectly inelastic; below 1 is inelastic; 1 is unitary; above 1 is elastic. Perfectly elastic demand is represented by a horizontal curve at one price in the model.