Presentation

on
relationship between price elasticity of
demand and revenues

Nepal Commerce Campus

Submitted By: Ranjeet Budhathoki

Submitted to: Biraj Pyakurel sir
 Introduction to Price elasticity of demand
and revenues
• Price elasticity of demand: It is defined as the percentage change in
quantity demanded due to percentage change in price.
Mathematically,
EP = % Change in quantity demanded/ % Change in price
• Total Revenue: It is defined as total sales receipts by a seller or firm
by the sales of its products. Mathematically,
TR = Q*P or TR = ∑MR=MR1 + MR2 + MR3 +…..+ MRn
• Average Revenue: It is defined as per unit price of quantity sold.
Mathematically,
AR = TR/Q or AR = P*Q/Q = P
• Marginal Revenue: It is defined as the addition made to the total
revenue by selling one more unit of the output.
Mathematically,
MR = TR/ Q or, MR = TRn - TRn-1
 Relationship of TR, AR and MR with Price Elasticity of Demand

Please note: The relationship between price elasticity of demand and revenues has great
significance in the economic analysis.
The total revenue can increase, decrease, or remain constant with the change in the price
of product depending upon the value of price elasticity.
To explain the relationship, we have to compute point price elasticity.
Relationship of TR, AR and MR with Price Elasticity of Demand
Here, the price elasticity of demand at point C on the average revenue (or demand
curve) = BC/AC

Point elasticity of demand at point C, EP = BC/AC ------(1)

In AFC and CGB
˂AFC = ˂CGB (A) [Being both the angles right angle]
˂ACF = ˂CBG (A) [Being corresponding angles]
˂FAC = ˂GCB (A) [Being remaining angles]
So, AFC is similar to CGB (From AAA)
∴ BC/AC =CG/AF -------(2)
From (1) and (2)
∴ Ep = CG/AF --------(3)
In AFE and EDC
˂AFE = ˂ECD (A) [Being both the angles right angle]
EF =EC (S) [Being E is the midpoint of F and C]
˂AEF = ˂CED (A) [Being vertically opposite angles]
∴ AEF is congruent to EDC (From ASA)
∴ CD =AF --------(4)
From (3) and (4)
EP = CG/CD =CG/(CG – DG)
Since, CG = AR and DG = MR at output OG
∴ EP = AR/(AR -MR)
Again,
EP (AR - MR) = AR
or, EP AR – EP MR = AR
or, EP AR – AR = EP MR
or, AR(EP - 1) = EP MR
or, AR = EP MR/ EP - 1
 or, AR = (EP * MR)/(EP – 1)
or, MR = [(EP - 1) * AR]/EP
or, MR = (EP/ EP – 1/ EP) * AR
or, MR = AR* (1 – 1/ EP) -------(5)
Here, the equation (5) helps to compute the marginal revenue as
follows:
1. If Ep > 1, MR > 0 : It means that if EP > 1 then MR will be
greater than 0 or positive. So, TR is increasing with increase
in price or AR and vice-versa.
2. If Ep = 1, MR = 0 : It means that if Ep = 1 then MR will be
equal to 0. So, TR is maximum and constant although there
is rise or fall in price or AR.
3. If Ep < 1, MR < 0 : It means that if Ep < 1 then MR will be less
than 0 or negative. So, TR is decreasing with decrease in
price or AR and vice-versa.
In a above figure, quantity sold and revenue are measured along x-axis and y-axis
respectively. At output range of 1 to 5 units, price elasticity of demand for commodity is
greater than unity (EP > 1), at output range of 5 to 6 units, price elasticity of demand for
commodity is equals to unity (EP = 1) and at output range of 6 to 10 units, price elasticity of
demand for commodity is less than unity (EP < 1).
THANK YOU