What happens to total revenue when a business with price inelastic demand raises its price?

Quantity demanded falls by proportionately less than the price rises, so total revenue rises. Inelastic demand allows a business to raise price with confidence.

A business sells 2,000 units at £50 and raises the price to £55, cutting sales to 1,900 units. Calculate the change in total revenue.

Revenue was £100,000 and becomes £104,500 after the price rise. Total revenue therefore rises by £4,500.

A business sells 400 units at £8 and cuts the price to £7, lifting sales to 500 units. Calculate the change in total revenue.

Revenue was £3,200 and becomes £3,500 after the price cut. Total revenue therefore rises by £300.

Why does a price cut damage revenue when demand is inelastic?

The lower price attracts too few extra buyers to replace the money given up on every unit. Revenue falls even though sales volume has risen.

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Enterprise, Business Plans and Location

Topic overview Enterprise, entrepreneurs and SMEs Needs, wants and spotting a business opportunity The role of the entrepreneur in setting up and running a business Financial and non-financial motives of entrepreneurs Characteristics and skills of entrepreneurs Entrepreneurs, SMEs and the sectors of the UK economy Stakeholders and their interests Business plans and sources of advice Choosing a business location

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Data and Market Analysis

Topic overview Presenting and interpreting business data Index numbers and comparing figures over time Calculating price elasticity of demand Interpreting price elasticity and its effect on revenue Income elasticity of demand Sales forecasting and the reliability of a forecast Moving averages and time-series analysis Correlation, scatter graphs and extrapolation Qualitative forecasting techniques

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Data and Market Analysis

Interpreting price elasticity and its effect on revenue

3 things to know
Component 2

Overview

What a price rise does to total revenue under elastic and inelastic demand, and why the answer decides whether raising the price is the right move at all.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

What happens to revenue when price rises under inelastic and under elastic demand?

Key term

Why does a price rise not automatically increase total revenue?

Key term

What is the impact on total revenue when a business with price elastic demand raises its price?

Questions from this subtopic

Each one with the model answer underneath.

1
Why does a price rise not automatically increase total revenue?
Model answer
A higher price is charged on fewer units, because quantity demanded falls. Revenue rises only if the loss of volume is proportionately smaller than the price increase.
2
What is the impact on total revenue when a business with price elastic demand raises its price?
Model answer
Quantity demanded falls by proportionately more than the price rises, so total revenue falls. A price rise is the wrong move where demand is elastic.
3
What happens to total revenue when a business with price inelastic demand raises its price?
Model answer
Quantity demanded falls by proportionately less than the price rises, so total revenue rises. Inelastic demand allows a business to raise price with confidence.
4
A business sells 2,000 units at £50 and raises the price to £55, cutting sales to 1,900 units. Calculate the change in total revenue.
Model answer
Revenue was £100,000 and becomes £104,500 after the price rise. Total revenue therefore rises by £4,500.
5
A business sells 400 units at £8 and cuts the price to £7, lifting sales to 500 units. Calculate the change in total revenue.
Model answer
Revenue was £3,200 and becomes £3,500 after the price cut. Total revenue therefore rises by £300.
6
Why does a price cut damage revenue when demand is inelastic?
Model answer
The lower price attracts too few extra buyers to replace the money given up on every unit. Revenue falls even though sales volume has risen.

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