The Relationship Between Revenue and Price Elasticity of Demand

By Jodi Beggs, About.com Guide

One important question for a company is what price it should charge for its output. Would it make sense to raise prices? To lower prices? To answer this question, it's important to consider how many sales would be gained or lost due to the changes in price. This is exactly where price elasticity of demand comes into the picture.

If a company faces elastic demand, then the percent change in quantity demanded for its output will be greater than a change in price that it puts in place. For example, a company that faces elastic demand could see a 20 percent increase in quantity demanded if it were to decrease price by 10 percent. Clearly, there are two effects on revenue happening here- more people are buying the company's output, but they are all doing so at a lower price- but the increase in quantity more than outweighs the decrease in price, and the company will be able to increase its revenue by decreasing its price. Conversely, if the company were to increase its price, the decrease in quantity demanded would more than outweigh the increase in price, and the company would see a decrease in revenue.

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• Price Elasticity of Demand and Revenue
• Price Elasticity of Demand and Revenue
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