Relationship Between Price Elasticity of Demand (PED) and Total Revenue
1. Total Revenue (Sales Revenue)
Sales revenue is the money a business receives from selling goods or services.
Formula:Sales Revenue = Price × Quantity Demanded
⚠️ Note:
Sales revenue is not the same as profit.
Profit = Sales Revenue − Total Costs of Production
2. Example (Laptop Retailer)
Original situation
Price = $700
Quantity sold = 5000 laptops
Original revenue
$700 × 5000 = $3,500,000
After price reduction
New price = $650
Quantity sold = 5500 laptops
New revenue
$650 × 5500 = $3,575,000
Change in revenue
$3,575,000 − $3,500,000 = +$75,000
✔ Revenue increased, so lowering the price was a good decision.
3. Calculating PED
Percentage change in quantity demanded
(5500 − 5000) / 5000 = +10%
Percentage change in price
($650 − $700) / $700 = −7.14%
PED
PED = −1.4
Since |PED| > 1, demand is price elastic. 5. Why PED is Important for Businesses
Firms use PED to decide pricing strategies to maximize revenue.
If demand is elastic → Lower price to increase revenue.
If demand is inelastic → Increase price to increase revenue.