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### Course: AP®︎/College Microeconomics>Unit 2

Lesson 3: Price elasticity of demand

# Total revenue and elasticity

One of the most practical applications of price elasticity of demand is its relationship to total revenue. A seller who knows the price elasticity of demand for their good can make better decisions about what happens if they raise or lower the price of their good. Explore the relationship between total revenue and elasticity in this video. Created by Sal Khan.

## Want to join the conversation?

• is it therefore true that the law of demand is flawed (or incomplete)? I think this contradicts the whole premise of the law...
• Law of demand says as P↑ Qd↓ and as P↓ Qd↑. Remember, that is quantity demanded, not demand. Also as shagun said, CETRIS PARIBUS, meaning all things stay the same.

When you are dealing with elasticity you are basically throwing cetris paribus out the window because you are changing how important(elastic or inelastic) the goods are to consumers.

Ed > 1(Elastic) = P↑ TR↓ or P↓ TR↑. They are inverses.

Ed < 1(Inelastic) = P↑ TR ↑ or P↓ TR↓. They are complimentary.

Ed = 1(Unit Elastic) TR stays the same as P↓ or P↑

Hope this helps.
• question; if the demand for a good is a is elastic, is it consider a necessity?
• no, usually necessities have inelastic demands because consumers need the product and are therefore willing to buy it at higher prices.
• Does this imply that for products that are elastic and the quantity demanded in highly sensitive to price change, maximum profit = point of unit elasticity?
• Maximum revenue is at the point of unit elasticity. However, maximum profit is where marginal revenue equals marginal cost.
• I don't mean to split hairs here, but if you get \$32, how much would you have to pay tax? Would you have to pay a portion of cash to the government for your business?
• They get \$32 per hour, but taxes are placed monthly, not hourly, and we don't know how many hours the business is open per month. But, yes, they would still have to pay some tax.
(1 vote)
• What is the difference between a change in supply and a change in quantity supplied
• Change in supply means that the whole supply curve is shifting (supply is increasing/decreasing). Change in quantity supplied is the change from one point in time (for example, January) to another point in time (for example, February). In short, supply is the overall view (long-term) while quantity supplied is at any given point in time. Edit: there are good videos in the first chapter of economics (Supply, demand and market equilibrium) where the concept "supply" vs. "quantity supplied" is explained very well.
• What is the connection between eleasticity and total revenue?
• Elasticity means that as the price increases, the total units sold decrease and, as a result, so does total revenue. Hope that helps.
• Is there any reason he used quantity instead of price on the x-axis of the total revenue graph? Or could he have also used price there?
• Using price would be OK to graph against revenue to find the maximum. The graph might stretch and shrink a bit but the shape would mostly flip left to right.because low quantity is related to high price, We graph numbers low on the left and high.on the right.
• Are there any exercises with this?
I don't really know if I understand this... It makes sense, but calculating with it could be different.
• I dont think Khan Academy has exercises for economics. Try to find questions online but a textbook is the best place.
``(TR2-TR1)/(P2-P1)=(Q2P2-Q1P1)/(P2-P1)``