Factors that influence Price Elasticity of Demand
Relationship between price elasticity of demand and changes in total revenue
The total revenue which a firm receives through selling a product is the price per unit sold X Quantity sold. Thus, if the price of a product is increased, usually, there will be a decrease in the quantity demanded. The effect which this development would have on total revenues depends on the relationship between the increase in price which is received in respect of each unit sold and the reduction in demand as a result of the price increase.
- When demand is inelastic a rise in price leads to rise in total revenue. For example, a 20% rise in price may cause demand to decrease by only 5% ( PED = -0.25).
- ‘When demand is elastic, a reduction in price leads to a rise in total revenue. For example, a 10 % reduction in price may cause demand to increase by 20% ( PED= +2.O)
The following table illustrates a number of aspects of the relationship between price elasticity of demand and changes in total revenue.
| Price Per unit Euros | Q demanded Units | Total Revenue | PED |
| 10.00 | 250 | 2,500 | 2 ( Demand elastic) |
| 9.00 | 300 | 2,700 | |
| 8.00 | 350 | 2,800 | 1.14 ( Demand is elastic) |
| 7.00 | 400 | 2,800 | |
| 6.00 | 450 | 2,700 | 0.87 (Demand is inelastic) |
Workings
The price is reduced from 10.00 to 9.00 euros. Demand increases from 250 units to 300.
= (10.00 -9.00) =-1.0/10 X100% = 10%
The quantity is increased from250 to 300 units.
= (300-250) = +50/250 x100%= 20%
PED = 20/10 = +2.
- The + 2 figure indicates that demand is elastic.
- A fall in price causes an increase in total revenue.
- The PED figures for other price reductions have been calculated accordingly.