Question

If demand is elastic, how will an increase in price change total revenue? Explain.

Short answer

If demand is elastic, then a price increase reduces the total revenue. When the price increases, then the demand falls by a considerable percentage. Then, total revenue starts moving in contradictory directions. Therefore, total income declines when the price of any commodity rises.

Step-by-step solution

Effect of elasticity on Price and Total Revenue:

An increase in the price of a good leads to a decrease in the demand for the good. Also, the revenue of that product begins falling. Due to price increase, total revenue starts moving in the opposite direction, resulting in a change in the percentage of quantity demand.

In the above graph, when the price increases, it leads to a constant fall in demand resulting in a decrease in total revenue. The price increases from $5 to $6, market demand falls from 60 to 20, resulting in a reduction of Total revenue from $300 to $120. Therefore, when demand is elastic, a decrease in total revenue is due to increased prices.