Revenue — Edexcel A-Level Economics A
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Revenue explained
Price elasticity of demand (PED) measures how quantity demanded responds to a price change.
Read the full explanation
Calculate PED as the percentage change in quantity demanded divided by the percentage change in price: PED = (%ΔQd) ÷ (%ΔP). For example, if price rises by 10% and quantity demanded falls by 20%, PED = −20% ÷ 10% = −2 (elastic). The relationship to revenue: when demand is elastic (|PED| > 1), a price rise reduces total revenue and a price cut increases it. When demand is inelastic (|PED| < 1), a price rise increases total revenue and a price cut reduces it. When demand is unit elastic (|PED| = 1), total revenue is maximised and unchanged by infinitesimally small price changes. Total revenue = price × quantity. Always interpret the sign and magnitude correctly.
Your focus
- Calculate price elasticity of demand using percentage changes in price and quantity demanded.
- Interpret the numerical value of PED to classify demand as elastic, inelastic or unit elastic.
- Explain and apply the relationship between PED and total revenue when price changes.
Revenue exam tips
Marking Points
- Calculates percentage change in quantity demanded and percentage change in price, then divides to find PED.
- Interprets the negative sign as the inverse relationship between price and quantity demanded, using the absolute value to judge elasticity.
- Classifies demand as elastic (|PED| > 1), inelastic (|PED| < 1) or unit elastic (|PED| = 1).
- Determines how a price change affects total revenue depending on whether demand is elastic, inelastic or unit elastic.
Examiner Tips
- 💡Show your calculation steps clearly, including the percentage changes, to avoid errors before selecting an option.
- 💡State the formula and substitute values before calculating; this demonstrates understanding and reduces errors.
- 💡When evaluating revenue effects, always link the elasticity classification to the direction of the revenue change to eliminate incorrect options.
Common Mistakes
- Forgetting to convert changes into percentages before dividing; correction: always express both changes as percentages of their original values.
- Ignoring the negative sign or treating it as an error; correction: the negative sign shows the inverse relationship, but elasticity is compared using the absolute value.
- Assuming a price rise always increases revenue; correction: revenue rises only if demand is inelastic; if demand is elastic, revenue falls.
- Confusing elastic with inelastic when |PED| is greater than 1; correction: |PED| > 1 means elastic, |PED| < 1 means inelastic.