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• total revenue
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Profit maximization - Total revenue - total cost perspective
The profit-maximizing output level is
represented as the one at which total
revenue is the height of C and total cost is
the height of B; the maximal profit is
measured as CB
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Price elasticity - Effect on total revenue
A firm considering a price change
must know what effect the change in
price will have on total revenue.
Revenue is simply the product of unit
price times quantity:
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Price elasticity - Effect on total revenue
Elasticity provides the answer: The
percentage change in total revenue is
approximately equal to the percentage
change in quantity demanded plus the
percentage change in price
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Price elasticity - Effect on total revenue
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As a result, the relationship between
PED and total revenue can be
described for any good:Gillespie,
Andrew (2002). p.51.Arnold, Roger
(2008). p. 385.
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Price elasticity - Effect on total revenue
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* When the price elasticity of demand
for a Good (economics and
accounting)|good is perfectly inelastic
(Ed = 0), changes in the price do not
affect the quantity demanded for the
good; raising prices will always cause
total revenue to increase
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Total revenue
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'Total revenue' is the total receipts of a firm from the
sale of any given quantity of a product.
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Total revenue
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It can be calculated as the selling price of
the firm's product times the quantity sold,
i.e. total revenue = price × quantity, or
letting TR be the total revenue function:
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Total revenue test
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In economics, the 'Total Revenue Test' is a
means for determining whether demand is
elasticity (economics)|elastic or inelastic. If an
increase in price causes an increase in total
revenue, then demand can be said to be
inelastic, since the increase in price does not
have a large impact on quantity demanded. If
an increase in price causes a decrease in
total revenue, then demand can be said to be
elastic, since the increase in price has a large
impact on quantity demanded.
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Total revenue test
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1. Product A currently sells for $10.
The seller decides to increase the
price to $15, but finds that he ends up
making less money. This is because
he is selling fewer of the product due
to the increased price, and his total
revenue has fallen. The demand for
this product must be elastic.
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Total revenue test - Mathematical explanation
On the other hand,
total revenue is given
by TR=P \cdot Q.
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Total revenue test - Mathematical explanation
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Since Q is a function of P, Q = f(P)
total revenue can be rewritten as
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Total revenue test - Mathematical explanation
The differential of total
revenue with respect to P is
thus:
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Total revenue test - Mathematical explanation
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To find the elasticity of demand using the
mathematical explanation of the total
revenue test, it’s necessary to use the
following rule:
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Total revenue test - Mathematical explanation
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If demand is elastic, E_d 0 \!\ : price and total
revenue move in opposite directions.
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Total revenue test - Mathematical explanation
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If demand is inelastic, E_d 0 \!\ : price and total
revenue change in the same direction.
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Total revenue test - Mathematical explanation
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If demand is unit elastic, E_d = 1, then
\frac = 0: an increase in price has no
influence on the total revenue.
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Total revenue test - Graph explanation
Total revenue can be represented by a
square or a rectangle formed by
connecting the following four points on the
demand graph: Price (P), Quantity
demanded (Q), Point on the Demand
Curve (A) and the origin zero (0) (the
intersection of the X axis and the Y axis).
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Total revenue test - Graph explanation
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This rectangle or square
is the measure of total
revenue.
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Total revenue test - Graph explanation
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When price or quantity change the square
changes. The change in total revenue
caused by price is called the price effect.
The change in total revenue caused by
quantity is called the quantity effect.
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