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Total Revenue - A Graphical Example - 8 |
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Let's imagine we operate a small canteen in a school.
I might say to you ''increasing the price of a can of Brand ''X'' soft drink from $1.00 per can to $1.40 per can is not a good idea. Our customers will buy Brand ''Y'' instead.'' |
''At the moment, we are selling 200 cans per day of Brand ''X'', at $1.00 per can. We are generating $1.00 per can x 200 cans = $200 per day in revenue from sales of Brand ''X''. I believe that we will only sell 120 cans per day if we increase the price of Brand ''X'' to $1.40 per can; resulting in a daily revenue of $1.40 per can x 120 cans = $168.''
''The revenue we gain from increasing the price per can ($0.40 x 120 = $48) will not be enough to offset the revenue we will lose from the decrease in the quantity of cans we sell ($1.00 x 80 = $80).''
I show you my reasoning, on a Supply and Demand diagram (shown above). Implicit in my reasoning is my belief that Brand ''X'' has a close substitute in Brand ''Y'', and that Brand ''X'' is price elastic.