Introductory Microeconomics 24: Price Elasticity of Demand and Firm's Revenue
Hi, I am Bob. Today let's explore how the firm's revenue varies as price changes. First, we figure out how a firm's revenue is calculated. Total revenue is equal to the price of the good times the quantity sold.
Second, let's consider how revenue changes with a price change. Compare these two supply and demand diagrams. We see that as the price increases, the firm's revenue could either increase or decrease. It depends on the price elasticity of demand.
We can prove it using the derivative of revenue with respect to price.
Today's video shows that when demand is price inelastic, i.e., the price elasticity is less than 1, the price and the firm's revenue move in the same direction: If the price increases, total revenue also increases. When demand is price elastic, i.e., the price elasticity is greater than 1, the price and the firm's revenue move in the opposite direction: If the price increases, total revenue decreases. If demand is unit elastic (a price elasticity equal to 1), total revenue remains constant when the price changes.
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