Overview
This lecture introduces the total revenue test as a quick method to determine whether demand is elastic or inelastic along a demand curve, using the example of ski lift ticket sales.
Total Revenue Concept
- Total revenue (TR) is the income businesses earn from selling their products.
- TR is calculated as price multiplied by quantity sold (TR = Price × Quantity).
- Example: At $100 per ski lift ticket and 2,000 tickets sold, TR = $200,000.
Calculating Total Revenue Along a Demand Curve
- At each price and corresponding quantity on the demand curve, TR is found by multiplying the two.
- At very high prices ($140) or very low prices ($0), TR will be zero since either quantity or price is zero.
- As price decreases from high levels, TR first increases, reaching a maximum at a certain price and quantity.
Total Revenue Curve
- The total revenue curve plots TR on the vertical axis and quantity on the horizontal axis.
- TR is maximized at a price ($70) and quantity (3,500), resulting in $245,000.
- Lowering the price below this maximizing point causes TR to decrease.
Using the Total Revenue Test
- If lowering price increases TR, demand is elastic in that range.
- If lowering price decreases TR, demand is inelastic in that range.
- The total revenue test helps identify elasticity without calculating the price elasticity of demand (PED) coefficient.
Key Terms & Definitions
- Total Revenue (TR) — The total income a business receives from selling its product (TR = Price × Quantity).
- Elastic Demand — Demand is elastic when a decrease in price increases total revenue.
- Inelastic Demand — Demand is inelastic when a decrease in price decreases total revenue.
- Total Revenue Test — A method to determine whether demand is elastic or inelastic by observing changes in TR as price changes.
Action Items / Next Steps
- Review previous lessons on price elasticity of demand and its determinants.
- Practice applying the total revenue test to other demand curve examples.