Price Elasticity of Demand and Total Revenue
Microeconomics
A diagram showing how price elasticity of demand affects total revenue, with total revenue maximized where demand is unitary elastic.
Curves and Elements
demand
Demand Curve (D): Shows the inverse relationship between price and quantity demanded, with elasticity changing along the curve.
elastic
Elastic Demand: When PED is greater than 1, a lower price causes total revenue to rise.
unitary
Unitary Elastic Demand: When PED equals 1, price and quantity changes perfectly offset, so total revenue is maximized.
inelastic
Inelastic Demand: When PED is less than 1, a lower price causes total revenue to fall.
total revenue
Total Revenue Curve: Shows that total revenue rises, reaches a maximum at unitary elasticity, and then falls as quantity increases.
Total revenue is calculated by multiplying price by quantity sold.
When demand is elastic, PED is greater than 1, so lowering price increases total revenue.
When demand is unitary elastic, PED equals 1, so total revenue is maximized.
When demand is inelastic, PED is less than 1, so lowering price decreases total revenue.
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