PED, Consumer Expenditure and Firms’ Revenue

PED and total revenue

PED and total revenue

• Revenue is the amount of money a firm receives from selling its goods or services

  • Total revenue = price x quantity

  • Also referred to as consumer expenditure from the buyer’s perspective

• The total revenue rule states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand, and decrease prices on products that are elastic in demand 

Illustrating the gains using a demand curve

Lowering price for elastic demand

• This can be illustrated using a demand curve

• The demand curve is very elastic in this market

• When a good or service is price elastic in demand, there is a greater than proportional increase in the quantity demanded to a decrease in price

• Total revenue is higher once the price has been decreased from P₁ to P₂

  • (P₂ x Q₂) > (P₁ x Q₁)

Raising price for inelastic demand

• The demand curve is very inelastic in this market

• The demand curve is very inelastic in this market

• When a good/service is price inelastic in demand, there is a smaller than proportional decrease in the quantity demanded to an increase in price

• Total revenue is higher once the price has been increased

  • (P₂ x Q₂) > (P₁ x Q₁)