Elasticity & Revenue

What happens to revenue when you change p?

Revenue: R= pq
Change in revenue w.r.t. p:
Using product rule - ->
dR = p x dq + q x 1= qE +q = q(1+ E)
dP dp

How does a price increase change revenue?
R increases if demand is inelastic as price increases
R decreases if demand is elastic as price increases
R is unchanged if demand is Unit-elastic as price increases
Inelastic demand |E| <1
1+E = +
|E| = 1 = unit elastic
E= -1 so 1+E= 0 so derivative= 0, indicating no change in revenue

What price maximizes revenue?
Price at which demand is unit-elastic

Set price elasticity = 1 and solve for p*




Marginal Revenue
What will happen to revenue when quantity q changes by one more unit of q

Dp x dq
Dq dp = 1

Q/p x dp/dq = 1/ (p/q x dq/dp)

Whenever demand is inelastic, marginal revenue is always a negative because 1/E (when
demand is inelastic) is a number smaller than -1 , 1+ a number smaller than a -1 is a negative
number
Whenever demand is elastic, marginal revenue is always positive

Linear demand: p(Q)= a-bq (inverse demand)
P=a-bq
-->Dp/dq = -b --> dE/dp= 1/-b
E= p/q x dq/dp = - a-bq
Bq
E= -1 --> A-bq = 1
bq
- -> a-bq= bq
- -> q= a
2b

E <-1 - -> A-bq < -1 which also equals a-bq > 1
bq bq

a-bq> bq
- -> a > q
2b

Linear Demand- Marginal Revenue
For a given quantity, how does MR (q) relates to inverse P(q)?
Below


How elastic is demand at the quantity at which MR= 0? Unit elastic because when MR=0,
revenue is maximized which only occurs at unit elastic demand

P= 60-5q
Marginal revenue = p+ q (dp/dq) = 60-5q-5q
= 60-10q