Price Elasticity of Demand vs. Total Revenue Test: A Clear Comparison

📚 Quick Study Guide

• 📈 Price elasticity of demand (PED) measures how much the quantity demanded of a good changes when its price changes.
• 📐 The formula for PED is: $PED = \frac{\% \, Change \, in \, Quantity \, Demanded}{\% \, Change \, in \, Price}$
• Elastic Demand: $PED > 1$ (Quantity demanded changes more than proportionally to price).
• Inelastic Demand: $PED < 1$ (Quantity demanded changes less than proportionally to price).
• Unit Elastic Demand: $PED = 1$ (Quantity demanded changes proportionally to price).
• Total Revenue (TR) is the total amount of money a firm receives from selling a good or service: $TR = Price \times Quantity$
• 💡 Total Revenue Test:
• If demand is elastic, a decrease in price will increase total revenue (and vice versa).
• If demand is inelastic, a decrease in price will decrease total revenue (and vice versa).
• If demand is unit elastic, a change in price will not change total revenue.

Practice Quiz

1. Which of the following best describes price elasticity of demand?

   1. The change in price due to a change in supply.
   2. The responsiveness of quantity demanded to a change in price.
   3. The total revenue generated at a specific price point.
   4. The cost of producing one additional unit of a good.

2. If the price of a product increases by 10% and the quantity demanded decreases by 5%, the demand is:

   1. Elastic
   2. Inelastic
   3. Unit elastic
   4. Perfectly elastic

3. If demand is elastic, what happens to total revenue when price decreases?

   1. Total revenue increases.
   2. Total revenue decreases.
   3. Total revenue remains the same.
   4. Total revenue fluctuates randomly.

4. If demand is inelastic, what happens to total revenue when price increases?

   1. Total revenue increases.
   2. Total revenue decreases.
   3. Total revenue remains the same.
   4. Total revenue becomes zero.

5. If the price elasticity of demand is equal to 1, demand is:

   1. Elastic
   2. Inelastic
   3. Unit elastic
   4. Perfectly inelastic

6. A company lowers its price, and total revenue stays the same. What type of demand does this product likely have?

   1. Elastic
   2. Inelastic
   3. Unit elastic
   4. Perfectly elastic

7. Which of the following goods is most likely to have inelastic demand?

   1. Luxury cars
   2. Movie tickets
   3. Prescription medication
   4. Designer clothing