would decrease from $42,000 ($0.30 times 140,000) to $32,000 ($0.20 times 160,000) So it appears that the impact of a price change on total revenue depends on the initial price and, by implication, the original elasticity We generalize this point in the remainder of this section The problem in assessing the impact of a price change on total revenue of a good or service is that a change in price always changes the quantity demanded in the opposite direction An increase in price reduces the quantity demanded, and a reduction in price increases the quantity demanded The question is how much Because total revenue is found by multiplying the price per unit times the quantity demanded, it is not clear whether a change in price will cause total revenue to rise or fall We have already made this point in the context of the transit authority Consider the following three examples of price increases for gasoline, pizza, and diet cola Suppose that 1,000 gallons of gasoline per day are demanded at a price of $4.00 per gallon Total revenue for gasoline thus equals $4,000 per day (=1,000 gallons per day times $4.00 per gallon) If an increase in the price of gasoline to $4.25 reduces the quantity demanded to 950 gallons per day, total revenue rises to $4,037.50 per day (=950 gallons per day times $4.25 per gallon) Even though people consume less gasoline at $4.25 than at $4.00, total revenue rises because the higher price more than makes up for the drop in consumption Next consider pizza Suppose 1,000 pizzas per week are demanded at a price of $9 per pizza Total revenue for pizza equals $9,000 per week (=1,000 pizzas per week times $9 per pizza) If an increase in the price of pizza to $10 per pizza reduces quantity demanded to 900 pizzas per week, total revenue will still be $9,000 per week (=900 pizzas per week times $10 per pizza) Again, when price goes up, consumers buy less, but this time there is no change in total revenue Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 240