Price
per
unit |
Quantity
Demanded |
Total Outlay
(or Total Revenue)
$ |
|---|
| 1.00 | 1,000 |
$1,000 |
| 2.00 | 900 |
$1,800 |
| 3.00 | 800 |
|
| 4.00 | 700 |
$2,800 |
| 5.00 | 600 |
$3,000 |
| 6.00 | 500 |
$3,000 |
| 7.00 | 400 |
$2,800 |
| 8.00 | 300 |
$2,400 |
| 9.00 | 200 |
$1,800 | |
Consider the table to your left.
The owner of the firm producing this good can see that increasing price will have
beneficial effects on total revenue, and on total profits. The increase in price
has seen demand fall (this is the law of demand in action), but despite this, total revenue
received will increase.
When price rises from $7 to $8, however, total outlays (total revenue) fall from
$2,800 to $2,400. Total outlays have fallen when price has risen.
This movement in opposite directions indicates that the demand for this good is
elastic (in this price range). Economists say the good has price elasticity
of more than 1.
The owner of this firm can see that increasing price is a bad idea:
total revenue received will fall. It is likely profit will fall if prices are
increased from $7 to $8. |
