What happens to total revenue when price increases? (2023)

What happens to total revenue when price increases?

When you increase price, you increase revenue on units sold (The Price Effect). When you increase price, you sell fewer units (The Quantity Effect).

: an increase in price has no influence on the total revenue.

A price increase will therefore increase total revenue while a price decrease will decrease total revenue. Finally, when the percentage change in quantity demanded is equal to the percentage change in price, demand is said to be unit elastic.

If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect. demand is less than 1), a higher price increases total revenue.

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On the other hand, if the price for an inelastic good is increased and the demand does not change, the total revenue increases due to the higher price and static quantity demanded.

If demand is elastic at a given price level, then should a company cut its price, the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue.

Whether the total revenue will grow or drop depends on the original price and quantity and the slope of the demand curve. For example, total revenue will rise due to an increase in quantity if the percentage increase in quantity is larger than the percentage decrease in price.

In an inelastic market, the change in price produces a noticeable change in the quantity of items purchased. Therefore, a price increase in an elastic market would lead to an increase in a company's total revenue. However, a price increase in an inelastic market would result in decrease in total revenue.

The correct answer is (d) Price increases and demand is price elastic.

What happens to total revenue if the price rises on a product with demand that is price elastic?

If price and quantity demanded change by the same percentage (i.e., if demand is unit price elastic), then total revenue does not change.

A change in price does not always have to result in an increase in revenue. When a company makes the decision to lower prices, the company must also consider that it may acquire additional customers with the change, especially if the decrease in price is substantial enough to include a new market.

The correct answer is (d) Price increases and demand is price elastic.

If the percent change in a good's price is offset by an equal percent change in the quantity demanded, economists would label the demand for that good as unit elastic. So if a price of a good increases by 20 percent and the quantity demanded decreases by 20 percent, the demand for that good is considered unit elastic.