The Relationship between Elasticity and Total Revenue
Exploration: See how elasticity changes along a demand curve and find where total revenue increases when price is increased.

How will consumers respond to a price change? Sales will increase if price falls, but by how much? Will a higher price lead most people to buy a substitute instead? And if they do, is it possible that the seller's revenue might actually decrease? The price elasticity of demand, E_d, is a measure of buyer responsiveness to price changes. It equals the ratio of the percent change in quantity demanded to the percent change in price. If the quantity change exceeds the price change in percentage terms, E_d is greater than one (in absolute value) and we say demand is elastic. Demand is inelastic if the quantity change is less than the price change in percentage terms and E_d is less than one (in absolute value). The elasticity of demand varies from one product to another. It may even vary for the same product: demand for a product may be more elastic at high prices than at low prices and is usually more elastic in the long run than in the short run.
     The following interactive graph illustrates the demand for soft drinks at a large grocery store. At the current price of $3, sales are 30 cases per week, generating total sales revenue of $90. By using your mouse to drag the green Demand slider to the left or right you can change the slope of the demand curve. You can also drag the maroon price triangle up and down and observe the relationship between price, quantity demanded, and total revenue. Click on the Elasticity Calculation button to calculate the price elasticity over the selected range of the demand curve.

1. Press the Reset button to begin. Use your mouse to drag the green Demand slider all the way to the right to make the demand curve flatter. Now use the maroon price triangle to reduce the price to $2. Click on the Elasticity Calculation button and observe the price elasticity of demand number and remember that value. Press the Reset button. Now use your mouse to drag the green Demand slider all the way to the left to make the demand curve steeper. Again, use the maroon price triangle to decrease the price to $2 and click on the Elasticity Calculation button and observe the price elasticity of demand number again. Compare this price elasticity of demand value with the one calculated before. What happens to the price elasticity of demand when the demand curve becomes steeper? Why does this happen? Is the price elasticity of demand a measure of the slope of the demand curve?
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2. Click on the Reset button. What is the elasticity of demand over the $4 to $5 price range?
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3. What is the elasticity of demand over the $1 to $2 price range?
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4. Experiment on your own. Over what range of the demand curve is demand elastic? Is there a point along the demand curve where E_d is 1, or "unit elastic?"
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5. Select an elastic range of the demand curve. What happens to total revenue when price is increased through this range?
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6. Select an inelastic range of the demand curve. What happens to total revenue when price is increased through this range?
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