Chapter - 2.7.2 , Content taken from save my exam , economics
Revenue is the amount of money a firm receives from selling its goods/services
Total revenue = price x quantity
The total revenue rule states that in order to maximize revenue, firms should increase the price of products that are inelastic in demand & decrease prices on products that are elastic in demand
This can be illustrated using a demand curve
Diagram Analysis
The demand curve is very elastic in this market
When a good/service is price elastic in demand, there is a greater than proportional increase in the quantity demanded to a decrease in price
Total revenue is higher once the price has been decreased
Diagram - 2
Diagram Analysis
The demand curve is very inelastic in this market
When a good/service is price inelastic in demand, there is a smaller than proportional decrease in the quantity demanded to an increase in price
Total revenue is higher once the price has been increased
Sales And Revenue
The sales revenue is the total earning done by a firm from its sales
The formula to calculate sales and revenue is ( Price of product × The quantity sold )
Example For Sales And Revenue Calculation
A firm raises the price of its products from £10 to £15. Its sales have fallen from 100 to 40 units per day. Explain if they made the correct decision
Solution - 1
As the price has increased from 10 to 15 pounds and it affects the quantity from 100 to 40
to calculate we have to use the formula Price times sales
15 times 40
Thus the sales and revenue would be = 600 Pounds