Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
E) The relationship between price elasticity of demand and total revenue
Full specification wording
Price elasticity of demand (PED): e) The relationship between price elasticity of demand and total revenue
Total revenue (TR) is price multiplied by quantity sold.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 5 of 5
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Total revenue (TR) is price multiplied by quantity sold. The link between price elasticity of demand (PED) and TR dictates how price changes affect income. If demand is price elastic (PED < -1), a price decrease causes a proportionately larger increase in quantity demanded, increasing TR. Raising prices when demand is elastic reduces TR. If demand is price inelastic (PED between 0 and -1), a price increase leads to a proportionately smaller fall in quantity demanded, meaning TR rises. Lowering prices when demand is inelastic reduces TR. For example, a train operator with inelastic peak demand increases TR by raising ticket prices. When demand is unitary elastic (PED = -1), TR is maximised and remains unchanged if prices are altered.
What earns the marks
- Identifies that total revenue is calculated as selling price multiplied by quantity sold.
- Explains that a price increase will increase total revenue if demand is price inelastic.
- Explains that a price decrease will increase total revenue if demand is price elastic.
- Recognises that total revenue is maximised when price elasticity of demand is unitary.
Common mistakes and how to put them right
Confusing elastic and inelastic demand outcomes.
Put it right: Inelastic demand means consumers are less responsive, so raising prices increases total revenue.
Assuming a price decrease always increases total revenue.
Put it right: A price decrease only increases total revenue if demand is price elastic.
Confusing total revenue with profit.
Put it right: Total revenue is the total income from sales, whereas profit also accounts for total costs.
Exam tips
- Always state the formula for total revenue when explaining the impact of a price change.
- Use numerical examples to demonstrate how a specific percentage change in price and quantity affects total revenue.
- When evaluating a pricing decision, consider whether the firm's objective is to maximise revenue or profit, as they may require different strategies.
Try the lesson
The start of the Price elasticity of demand (PED): e) The relationship between price elasticity of demand and total revenue lesson, made from checked teaching notes for this specification point.
Have a go first
If a product has a price inelastic demand, what will be the effect on total revenue if the firm increases the price of the product?
Listen
Total revenue (TR) is price multiplied by quantity sold. The link between price elasticity of demand (PED) and TR dictates how price changes affect income. If demand is price elastic (PED < -1), a price decrease causes a proportionately larger increase in quantity demanded, increasing TR. Raising prices when demand is elastic reduces TR. If demand is price inelastic (PED between 0 and -1), a price increase leads to a proportionately smaller fall in quantity demanded, meaning TR rises. Lowering prices when demand is inelastic reduces TR. For example, a train operator with inelastic peak demand increases TR by raising ticket prices. When demand is unitary elastic (PED = -1), TR is maximised and remains unchanged if prices are altered. A strong answer earns marks for these points. Identifies that total revenue is calculated as selling price multiplied by quantity sold. Explains that a price increase will increase total revenue if demand is price inelastic. Explains that a price decrease will increase total revenue if demand is price elastic. Recognises that total revenue is maximised when price elasticity of demand is unitary. A common slip: Confusing elastic and inelastic demand outcomes. Instead, inelastic demand means consumers are less responsive, so raising prices increases total revenue. Exam tip: Always state the formula for total revenue when explaining the impact of a price change.
Key words
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Total revenue
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Price elastic demand
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Price inelastic demand
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Unitary elastic demand
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See every definition
- Total revenue
- Price multiplied by quantity sold, representing the total income from sales.
- Price elastic demand
- Where PED is less than -1, so a price decrease causes a proportionately larger increase in quantity demanded and raises total revenue.
- Price inelastic demand
- Where PED is between 0 and -1, so a price increase leads to a proportionately smaller fall in quantity demanded and total revenue rises.
- Unitary elastic demand
- Where PED equals -1, at which total revenue is maximised and remains unchanged if prices are altered.
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