Maximizing Profit: The Total Revenue Test and PED Explained

📚 Quick Study Guide

• 📈 Total Revenue (TR): The total income a business receives from selling its products or services. Calculated as Price (P) × Quantity (Q).
• 🧪 Total Revenue Test: A method to determine the price elasticity of demand by examining how total revenue changes when price changes.
• ➗ Price Elasticity of Demand (PED): Measures the responsiveness of the quantity demanded of a good or service to a change in its price. Formula: $PED = \frac{\% \ Change \ in \ Quantity \ Demanded}{\% \ Change \ in \ Price}$
• 💸 Elastic Demand: If |PED| > 1. Total revenue moves in the OPPOSITE direction of the price change.
• ⚖️ Inelastic Demand: If |PED| < 1. Total revenue moves in the SAME direction as the price change.
• 🤝 Unit Elastic Demand: If |PED| = 1. Total revenue remains constant when the price changes.
• 💡 Midpoint Formula: Used for calculating percentage changes to ensure consistent results regardless of the direction of the price change. $\frac{(Q_2 - Q_1)}{((Q_2 + Q_1)/2)} / \frac{(P_2 - P_1)}{((P_2 + P_1)/2)}$

Practice Quiz

1. Which of the following formulas represents Total Revenue (TR)?
   1. A. TR = Price + Quantity
   2. B. TR = Price - Quantity
   3. C. TR = Price × Quantity
   4. D. TR = Price ÷ Quantity
2. If a company increases its price and total revenue decreases, demand is:
   1. A. Perfectly Inelastic
   2. B. Inelastic
   3. C. Unit Elastic
   4. D. Elastic
3. If the PED is 0.5, demand is considered:
   1. A. Elastic
   2. B. Inelastic
   3. C. Unit Elastic
   4. D. Perfectly Elastic
4. Using the midpoint formula, if price increases from $10 to $12 and quantity demanded decreases from 20 to 15, what is the approximate PED?
   1. A. 1.29
   2. B. 2.0
   3. C. 0.77
   4. D. 0.5
5. If demand is unit elastic and a company raises its price, what happens to total revenue?
   1. A. Increases
   2. B. Decreases
   3. C. Stays the same
   4. D. Fluctuates randomly
6. The total revenue test is used to determine:
   1. A. Production Costs
   2. B. Market Share
   3. C. Price Elasticity of Demand
   4. D. Profit Margin
7. If the percentage change in quantity demanded is 20% and the percentage change in price is 10%, what is the PED?
   1. A. 0.5
   2. B. 2.0
   3. C. 1.0
   4. D. 3.0