Elasticity and Revenue

Business Calculus · Axiom Academy

How price elasticity determines the impact of pricing decisions on revenue Elasticity Determines Revenue Impact There's a powerful connection between price elasticity and how price changes affect total revenue: When you change price, two things happen simultaneously: Price effect: Higher price per unit Quantity effect: Fewer units sold Elasticity tells us which effect dominates! There's an elegant formula connecting MR and elasticity: Marginal Revenue in terms of Price and Elasticity When |E| = 1: MR = p(1 - 1) = 0 → Revenue is maximized! When |E| > 1: MR > 0 → Selling more increases revenue When |E| < 1: MR < 0 → Selling more decreases revenue MR > 0: Demand is elastic (|E| > 1) MR = 0: Demand is unit elastic (|E| = 1) MR Demand is inelastic (|E| < 1) Upper region (small x): Elastic demand, MR > 0, lowering price increases revenue Peak of revenue curve: Unit elastic, MR = 0, revenue maximized Lower region (large x): Inelastic demand, MR < 0, raising price increases revenue A luxury hotel has |E| = 0.6. To increase revenue, they should: At what elasticity value is revenue maximized? Elastic (|E| > 1): Lower price to increase revenue Inelastic (|E| < 1): Raise price to increase revenue Unit elastic (|E| = 1): Revenue is at maximum MR = p(1 - 1/|E|) connects elasticity to marginal revenue

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