The demand for gasoline is price inelastic, and total revenue moves in the direction of the price change When price rises, total revenue rises Recall that in our example above, total spending on gasoline (which equals total revenues to sellers) rose from $4,000 per day (=1,000 gallons per day times $4.00) to $4037.50 per day (=950 gallons per day times $4.25 per gallon) When demand is price inelastic, a given percentage change in price results in a smaller percentage change in quantity demanded That implies that total revenue will move in the direction of the price change: an increase in price will increase total revenue, and a reduction in price will reduce it Consider again the example of pizza that we examined above At a price of $9 per pizza, 1,000 pizzas per week were demanded Total revenue was $9,000 per week (=1,000 pizzas per week times $9 per pizza) When the price rose to $10, the quantity demanded fell to 900 pizzas per week Total revenue remained $9,000 per week (=900 pizzas per week times $10 per pizza) Again, we have an average quantity of 950 pizzas per week and an average price of $9.50 Using the arc elasticity method, we can compute: Percentage change in quantity demanded=−100/950=−10.5% Percentage change in price=$1.00/$9.50=10.5% Price elasticity of demand=−10.5%/10.5%=−1.0 Demand is unit price elastic, and total revenue remains unchanged Quantity demanded falls by the same percentage by which price increases Consider next the example of diet cola demand At a price of $0.50 per can, 1,000 cans of diet cola were purchased each day Total revenue was thus Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 243