All subjects · Economics · WEC11 Markets in action

Price elasticity, total revenue and the straight-line demand curve

Edexcel IAL Economics · WEC11 Markets in action

Firms care about PED because it tells them what a price change will do to their revenue. This lesson covers spec point 1.3.2.3 (e) to (g): calculating total revenue, why PED varies along a straight-line demand curve, and the link between PED and total revenue.

Practise this in the app: instant marking and a fix for every mistake. Free, no email needed to start.

Practise this lesson

Total revenue

Total revenue (TR) = price x quantity sold. On a demand diagram, TR is the rectangle under the demand curve: from the origin across to the quantity and up to the price.

When price changes, the firm gains revenue from the higher (or lower) price on the units it still sells, and loses (or gains) revenue on the units no longer (or newly) sold. PED tells us which effect is bigger.

PED and total revenue

Elastic demand: a price cut raises TR (quantity rises by a larger percentage); a price rise lowers TR.
Inelastic demand: a price rise raises TR (quantity falls by a smaller percentage); a price cut lowers TR.
Unitary elastic: TR does not change when price changes.

Diagram in words (inelastic case): a steep demand curve. Raise price from P1 to P2; quantity falls only a little, from Q1 to Q2. The rectangle of revenue gained (P1 to P2 multiplied by Q2) is larger than the thin rectangle of revenue lost (Q2 to Q1 multiplied by P1), so TR rises.

PED along a straight-line demand curve

A straight-line demand curve has a constant slope but not a constant elasticity. Point PED = (change in Q / change in P) x (P / Q).

Take Qd = 100 - 5P. The slope term is -5 everywhere, but P/Q changes:

at P = 16, Q = 20: PED = -4 (elastic)
at P = 10, Q = 50: PED = -1 (unitary, the midpoint)
at P = 4, Q = 80: PED = -0.25 (inelastic)

So demand is elastic in the upper half of a straight-line demand curve, unitary at the midpoint and inelastic in the lower half. TR is maximised at the midpoint (here TR = 500 at P = 10, compared with 480 at P = 8 and 480 at P = 12). Diagram in words: draw a TR curve underneath with quantity on the horizontal axis; it is an upside-down U, rising while demand is elastic and peaking where PED = -1.

Worked example

Using Qd = 100 - 5P, a firm charging $16 cuts its price to $12. What happens to total revenue, and why?

At $16, Q = 20, TR = 16 x 20 = $320.
At $12, Q = 40, TR = 12 x 40 = $480.
TR rises by $160 because demand is price elastic in this upper part of the curve (point PED at $16 is -4).

Answer: TR rises from $320 to $480: demand is elastic, so the price cut raises revenue.

Key idea: TR = P x Q. Elastic: cut price to raise TR. Inelastic: raise price to raise TR. Unitary: TR unchanged. On a straight-line demand curve PED falls from elastic to inelastic as price falls; TR peaks at the midpoint.

Check yourself

A cinema sells 800 tickets at $12. Calculate total revenue.
Show answer
$9600. TR = 12 x 800 = $9,600.
Using Qd = 100 - 5P, calculate the change in total revenue when price rises from $4 to $8.
Show answer
$160. TR at $4 = 4 x 80 = 320; TR at $8 = 8 x 60 = 480; change = 160. Demand is inelastic here, so the price rise raises TR.
Using Qd = 100 - 5P, calculate point PED at a price of $12.
Show answer
-1.50. Q = 40. PED = -5 x 12 / 40 = -1.5.
Demand for a firm's product is price inelastic. If it raises its price, total revenue will
- fall
- stay the same
- fall to zero
- rise
Show answer
rise. The percentage fall in quantity is smaller than the percentage rise in price.
On a straight-line downward-sloping demand curve, total revenue is greatest
- where the curve meets the price axis
- at the midpoint, where PED = -1
- where the curve meets the quantity axis
- at every point equally
Show answer
at the midpoint, where PED = -1. TR rises while demand is elastic and falls once it becomes inelastic.
On a straight-line demand curve, demand in the upper half (high price, low quantity) is
- price inelastic
- unitary elastic
- perfectly inelastic
- price elastic
Show answer
price elastic. P/Q is large there, so the PED is large.
Explain why a price cut raises total revenue when demand is price elastic.
Show answer
When demand is elastic, the percentage rise in quantity demanded is greater than the percentage fall in price, so the revenue gained from extra units sold outweighs the revenue lost from the lower price on existing units.. Compare the two percentage changes and the two revenue effects.

Practise with instant feedback

Sources

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

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