If a retailer sells 5000 laptops at $700 each, then its sales revenue is $3.5 million. Suppose the retailer reduces its price to $650 and quantity demanded rises to 5500 units in the following quarter. Was this a good business decision? A quick calculation of PED reveals that the demand for the laptops is price elastic
Percentage change in quantity demanded = (5500 – 5000)/5000 = +10%
Percentage change in price = ($650 – $700)/$700 = −7.14%
PED = −1.4
Result of change in revenue
Original sales revenue = $700 × 5000 = $3,500,000
New sales revenue = $650 × 5500 = $3,575,000
Difference in sales revenue = $3.575m − $3.5m = +$75,000
Graphs
Here the demand curve is relatively price inelastic (rather unresponsive to changes in price). If the firm raises its price, the percentage increase in price is far greater than the subsequent fall in demand. Hence, sales revenue will increase (and vice versa)
The demand curve is relatively price elastic (somewhat responsive to changes in price). A cut in price will therefore lead to a net gain in sales revenue. By contras