Elastic Demand Total Revenue Quiz

With elastic demand, consumers are highly responsive to price changes. When price rises, the proportional drop in quantity demanded is larger than the proportional rise in price. Because more revenue is lost from the large quantity reduction than is gained from the higher price per unit, total revenue falls. This inverse relationship between price and total revenue is the defining revenue consequence of elastic demand.

When demand is elastic, a price reduction triggers a proportionally larger increase in quantity demanded. The gain in revenue from selling many more units exceeds the loss from the lower price per unit, resulting in higher total revenue overall. This is why sellers in competitive markets with highly elastic demand often find that price reductions are profitable: the large boost in sales volume more than compensates for the smaller margin earned on each individual unit sold.

Original total revenue is $12 multiplied by 8,000, which equals $96,000. New total revenue is $9 multiplied by 13,000, which equals $117,000. Total revenue rose by $21,000 after the price cut, confirming elastic demand. The 62.5% increase in subscribers far exceeded the 25% price reduction. When total revenue rises after a price decrease, demand is elastic because consumers responded more than proportionally to the lower price.

A specific brand of bottled water in a market with many similar alternatives has elastic demand because consumers can easily switch to a competitor if the price rises. When demand is elastic, a price increase leads to a disproportionately large drop in quantity sold, reducing total revenue. Insulin, surgery, and salt are necessities with few or no substitutes, making their demand inelastic and less sensitive to price changes.

Elastic demand exists when consumers respond more than proportionally to a price change. A price elasticity of demand greater than 1 confirms this: for every 1% change in price, quantity demanded changes by more than 1%. This strong consumer responsiveness is what causes total revenue to move in the opposite direction from price for elastic goods, since the large quantity change dominates the revenue calculation and outweighs the effect of the price change itself.

With elastic demand, a price increase from $50 to $65 (a 30% rise) would cause quantity demanded to fall by more than 30%. The revenue lost from selling significantly fewer tickets would outweigh the higher price per ticket, causing total revenue to fall below $100,000. Sellers with elastic demand must be cautious about raising prices, as the resulting decline in sales volume typically reduces total revenue rather than increasing it.

Elastic demand is defined by strong consumer responsiveness to price changes, with the percentage change in quantity exceeding the percentage change in price. This responsiveness causes total revenue to move inversely with price: increases lower total revenue, while decreases raise it. The third statement describes inelastic demand, where quantity changes by a smaller proportion than price, which is the opposite of what characterizes elastic demand.

A 20% price reduction that produces a 35% increase in quantity sold confirms elastic demand. The proportional gain in sales exceeded the proportional price cut, so total revenue increased. This is exactly what elastic demand predicts: lowering the price attracts enough additional buyers to more than compensate for the lower earnings per unit, making price reductions a revenue-enhancing strategy when consumers are highly price-responsive.

Raising prices when demand is elastic reduces total revenue because the resulting drop in quantity sold is proportionally larger than the price increase. Each unit earns more, but far fewer units are sold, and the revenue lost from the volume decline exceeds the extra revenue from the higher price. To maximize revenue when demand is elastic, a seller should lower prices, not raise them, to generate the proportionally larger increase in sales volume that drives total revenue upward.

When two goods are close substitutes, demand for each is highly elastic. A price increase at Restaurant A causes a disproportionately large loss of customers to the cheaper alternative, Restaurant B. Restaurant A earns more per meal but sells far fewer, causing its total revenue to fall. This real-world scenario perfectly illustrates how elastic demand, driven by the availability of substitutes, causes total revenue to decline when prices are raised.

With elastic demand, a 25% price increase (from $8 to $10) would cause subscribers to fall by more than 25%. A drop to 700,000 (a 30% reduction) gives new total revenue of $7 million, down from $8 million. This outcome is consistent with elastic demand: the proportional loss in quantity exceeds the proportional gain from the higher price, causing total revenue to fall, which is the defining revenue consequence of elastic demand.

When many substitutes are available, consumers can easily switch away from a good if its price rises. This ease of substitution makes demand highly elastic, meaning even a modest price increase causes a large drop in quantity demanded and a fall in total revenue. Sellers of goods with close substitutes must therefore be especially careful about raising prices, as the competitive environment makes their total revenue highly vulnerable to pricing decisions.

When total revenue rises after a price reduction, it directly confirms that demand is elastic. The 8% price cut triggered a consumer response large enough to increase total revenue by 12%, meaning the percentage increase in quantity demanded was greater than 8%. This is precisely what elastic demand predicts: price cuts attract a disproportionately large increase in buyers, and the revenue gained from more sales outweighs the revenue lost from the lower price per unit.

For sellers facing elastic demand, lowering prices and offering discounts are effective revenue strategies because the quantity response from consumers more than compensates for the lower price per unit. Monitoring competitors is also critical since the availability of substitutes is a primary driver of demand elasticity. Raising prices is the wrong strategy under elastic demand as it causes a disproportionate quantity loss that reduces total revenue rather than increasing it.

When total revenue falls after a price increase, it confirms that demand is elastic. A 15% price rise that caused an 8% drop in total revenue means a significant number of buyers stopped purchasing at the higher price. The revenue lost from the quantity reduction exceeded the extra revenue from the higher price per unit. This is the core prediction of elastic demand: price increases reduce total revenue by triggering a proportionally larger consumer quantity response.