Price elasticity, pricing decisions and total revenue

Total revenue and PED

Total revenue (TR) = price x quantity sold.

• Price elastic demand: a price rise reduces TR (the % fall in sales is bigger than the % rise in price); a price cut raises TR.
• Price inelastic demand: a price rise increases TR; a price cut reduces TR.
• Unitary: TR is unchanged.

Memory aid: with inelastic demand, price and revenue move in the same direction; with elastic demand, they move in opposite directions.

Calculating the new revenue

Method:

1. Find the new price.

2. Use PED to find the % change in quantity, then the new quantity.

3. New TR = new price x new quantity.

4. Compare with the old TR.

Always show working: Pearson calculation questions give K1 for the formula, A2 for working and An1 for the answer with its unit.

Significance for pricing

• Firms with inelastic demand (strong brands, necessities, few rivals) can raise prices to increase revenue and, since fewer units are made, often reduce costs too, so profit rises.
• Firms with elastic demand should be cautious about price rises; price cuts or promotions can raise revenue, though profit depends on costs of the extra output.
• Firms try to make demand less elastic by branding, differentiation and loyalty schemes.

Evaluation points: PED estimates come from past data and may be out of date; PED differs between price ranges and over time; rivals may react (matching a price cut); revenue is not profit; and other factors (incomes, tastes) change at the same time, so ceteris paribus rarely holds.

Worked example

A gym charges $40 a month and has 1,000 members. PED is estimated at -0.6. It raises the price to $44. Calculate the change in total revenue.

1. % change in price = 10%.
2. % change in members = -0.6 x 10 = -6%; new members = 1,000 x 0.94 = 940.
3. Old TR = 40 x 1,000 = $40,000. New TR = 44 x 940 = $41,360.
4. Change = +$1,360.

Answer: Revenue rises by $1,360 because demand is price inelastic.

Check yourself

1. Demand for a product is price elastic. The firm raises its price. What happens to total revenue?
   • It rises
   • It falls
   • It stays the same
   • It doubles
   Show answer

   It falls. The % fall in quantity is bigger than the % rise in price.

2. A firm wants to raise total revenue and knows its demand is price inelastic. What should it do?
   • Cut its price
   • Keep its price the same
   • Give the product away
   • Raise its price
   Show answer

   Raise its price. With inelastic demand, price and revenue move together.

3. A cafe sells 2,000 sandwiches a week at $5. PED is -1.5. It cuts the price by 10%. Calculate the new weekly total revenue.
   Show answer

   $10350. New price $4.50; %Qd = -1.5 x -10 = +15%; new quantity 2,300; TR = 4.50 x 2,300 = $10,350.

4. From the previous situation (2,000 sandwiches at $5, cut to $4.50 with PED -1.5), by how much does weekly revenue change?
   Show answer

   $350. 10,350 - 10,000 = $350.

5. A phone network has 50,000 customers paying $30 a month. PED = -0.3. It raises the price by 20%. Calculate the new monthly total revenue.
   Show answer

   $1692000. New price $36; %Qd = -0.3 x 20 = -6%; customers 47,000; TR = 36 x 47,000 = $1,692,000.

6. Give one reason why a business should be cautious when using a PED estimate to set its price.
   Show answer

   The estimate is based on past data, and conditions such as competitors' prices, incomes or tastes may have changed, so the actual response of customers may differ.. PED values are estimates from past data and conditions change.

7. Why might a price cut that raises revenue still reduce profit?
   • Producing the extra units adds costs that may exceed the extra revenue
   • Revenue and profit are always equal
   • Price cuts always reduce costs
   • Profit depends only on price
   Show answer

   Producing the extra units adds costs that may exceed the extra revenue. Profit = revenue - costs; more output means more costs.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson WBS11/01 mark scheme, October 2024 series (published January 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.