Principles of Microeconomics / Unit 4 MIC 0314 worked example, 60 to 90 seconds
The Total Revenue Test
The idea
Revenue moves with whichever variable changes by the larger percentage. If demand is elastic, quantity changes more, so a price cut raises revenue and a price rise lowers it. If demand is inelastic, price changes more, so a price rise raises revenue and a cut lowers it. If demand is unit elastic, revenue is unchanged either way. So to raise revenue: cut the price where demand is elastic, raise it where demand is inelastic, and leave it where demand is unitary.
In practice
Worked example: the museum from video three oh four sells eight hundred tickets at twelve dollars, nine thousand six hundred dollars, and one thousand at ten dollars, ten thousand dollars. Demand was elastic there, so the price cut raised revenue. A transit line sells forty thousand rides at two dollars, eighty thousand dollars; a rise to two dollars twenty cuts rides to thirty-eight thousand, eighty-three thousand six hundred dollars. Demand was inelastic, so the rise raised revenue.
Where people slip
Revenue is not profit. A price cut that raises revenue also raises the quantity produced and its cost, so a firm needs both numbers. And the test says where revenue rises, not that a seller should chase it; sellers sometimes price below the revenue maximum on purpose.
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