FIGURE 3 TOTAL REVENUE AND ELASTICITY OF DEMAND
imageGiven inelastic demand in panel A, when price rises from $2 to $4, revenue rises because the revenue gained from the price hike ($1,000) is greater than the revenue lost from fewer sales ($200). The price hike may have driven off a few customers, but the firm’s many remaining customers are paying a much higher price, thus increasing the firm’s revenue. When products have elastic demand as shown in panel B, usually because many substitutes are available, firms feel a greater impact from changes in price. A small rise in price causes sales to fall off dramatically.