Overview
This lecture explains how changes in price affect a firm's revenue, focusing on the concept of elasticity of demand and its impact on revenue outcomes.
Revenue and Its Calculation
- Revenue is the total sales, calculated as price multiplied by quantity sold.
- Example: Selling 10 pizzas at $20 each yields $200 in revenue.
Relationship Between Price Changes and Revenue
- Raising prices increases revenue per item but tends to decrease the quantity sold.
- Whether total revenue increases or decreases depends on the price elasticity of demand.
Elasticity and Revenue Outcomes
- Elastic Demand: Percentage change in quantity demanded is greater than the percentage change in price.
- Raising prices decreases total revenue because loss in sales outweighs the price gain.
- Lowering prices increases total revenue because increased sales outweigh the lower price.
- Inelastic Demand: Percentage change in quantity demanded is less than the percentage change in price.
- Raising prices increases total revenue because loss in sales is smaller than price gain.
- Lowering prices decreases total revenue because people would have bought anyway.
- Unitary Elasticity: Percentage change in quantity equals the percentage change in price.
- Changing price does not affect total revenue.
Special Cases: Perfect Elasticity and Perfect Inelasticity
- Perfectly elastic demand: Any price increase results in zero sales; raising prices causes revenue to drop to zero.
- Perfectly inelastic demand: Quantity demanded remains the same regardless of price; raising prices always increases revenue.
Profits vs. Revenue
- A firm's main goal is to maximize profits, not revenue.
- Profits equal revenue minus costs; sometimes higher revenue does not mean higher profits if costs rise more.
Key Terms & Definitions
- Revenue — Total sales income, calculated as price times quantity.
- Elasticity of demand — A measure of how much quantity demanded changes in response to price changes.
- Elastic demand — Quantity demanded changes greatly with price changes.
- Inelastic demand — Quantity demanded changes little with price changes.
- Unitary elasticity — Percentage change in quantity equals percentage change in price.
Action Items / Next Steps
- Review concepts of elasticity and their effects on revenue.
- Await the next video for continuation.